Apple has made a technological breakthrough, its new NextPhone product. Initial investment in development is expected to be $140 million. The project should have a useful life cycle of 5 years before newer technology replaces it. The price per phone is expected to be $200 based on phone prices now. The variable cost of production per phone is expected to be $120 based on production costs now. (There are no fixed costs except the initial investment.) Demand for the phone is expected to be 1 million units (phones) per year (remaining the same in each of the 5 years of the project). The initial investment would be depreciated according to 5-year MACRS. At the end of the project, the equipment could be sold for $20M based on prices for 5-year-old equipment now.

Inflation is expected to be 5% per year in electronic products such as the NextPhone; 2% per year in production costs; and 1% per year in equipment for production. Apples nominal WACC for this project is 15%, and its tax rate is 35%. There is no impact on working capital. Calculate the NPV for this project.

a. 125,324,942

b. 130,572,234

c. 123,591,468

d. 121,348,984

To reduce the steps in solving this problem, consider the following partially completed nominal analysis:

Year: 0 1 2 3 4 5 11.52% 5-Year MACRS Depreciation Tax Basis/Book Value Salvage Price-Real Salvage Price- Nominal 20.00% 32.00% 19.20% 11.52% 28,000,000 112,000,000 67,200,000 40,320,000 24,192,000 140,000,000 8,064,000 20,000,000 1,000,000 1,000,000 1,000,000 1,000,000 200.00 Unit Sales Price Revenue Cost Per Unit Cost 1,000,000 210.00 210,000,000 122.40 122,400,000 120.00 Revenue Cost Depreciation EBIT Taxes (Unlevered) Net Income 210,000,000 122,400,000 28,000,000 59,600,000 50,852,000 20,860,000 17,798,200 27,055,014 33,978,487 37,323,516 38,740,000 69,315,100 28,000,000 (140,000,000) Plus Depreciation Less CapEx Salvage Net of Taxes FCF 140,000,000) 66,740,000 101,928,631 NPV Year: 0 1 2 3 4 5 11.52% 5-Year MACRS Depreciation Tax Basis/Book Value Salvage Price-Real Salvage Price- Nominal 20.00% 32.00% 19.20% 11.52% 28,000,000 112,000,000 67,200,000 40,320,000 24,192,000 140,000,000 8,064,000 20,000,000 1,000,000 1,000,000 1,000,000 1,000,000 200.00 Unit Sales Price Revenue Cost Per Unit Cost 1,000,000 210.00 210,000,000 122.40 122,400,000 120.00 Revenue Cost Depreciation EBIT Taxes (Unlevered) Net Income 210,000,000 122,400,000 28,000,000 59,600,000 50,852,000 20,860,000 17,798,200 27,055,014 33,978,487 37,323,516 38,740,000 69,315,100 28,000,000 (140,000,000) Plus Depreciation Less CapEx Salvage Net of Taxes FCF 140,000,000) 66,740,000 101,928,631 NPV