Question
Apple is planning to launch a new easy-to-use kitchen appliance with a touchscreen interface, the iToaster. Apple expects to sell 1 million and 2 million
Apple is planning to launch a new easy-to-use kitchen appliance with a touchscreen interface, the iToaster. Apple expects to sell 1 million and 2 million units in the first two years after launch, respectively, and then to discontinue this product. Each unit will sell for $200 in the first year after launch, and $150 in the second year. The costs of components and labor are $90 per unit, while salaries and other expenses add up to $10 million in each year the product is sold.
The factory that manufactures the iToaster requires an investment of $70 million right now and $35 million one year from now. It will take one year to complete, so production will only start in the second year. The factory will be depreciated linearly to zero over 5 years after its completion.
To get production up and running, Apple has to buy components worth $5 million immediately before the launch of the product, and add another $2 million worth of components to its inventory exactly one year later.
The firm's marginal tax rate is 34%. Part 1 What is the annual depreciation (in $ million)?
Part 2 What is the net operating profit after taxes in year 2 (in $ million)?
Part 3 What is the net operating profit after taxes in year 3 (in $ million)?
Part 4 What is the free cash flow (FCF) at the end of year 0 (in $ million)?
Part 5 What is the free cash flow (FCF) at the end of year 1 (in $ million)?
Part 6 What is the free cash flow (FCF) at the end of year 2 (in $ million)?
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