Question
Assume that the projects profitability will be similar to IBMs existing projects in the latest fiscal year and estimate (revenues - costs) each year by
- Assume that the projects profitability will be similar to IBMs existing projects in the latest fiscal year
and estimate (revenues - costs) each year by using the latest EBITDA/Sales profit margin. Calculate
EBITDA as EBIT + Depreciation expense from the cash flow statement.
- Determine the annual depreciation by assuming IBM depreciates these assets by the straight-line
method over a five-year life.
- Calculate the net working capital required each year by assuming that the level of NWC will be a constant percentage of the projects sales. Use IBMs NWC/Sales for the latest fiscal year to estimate the required percentage. (Use only accounts receivable, accounts payable, and inventory to measure working capital. Other components of current assets and liabilities are harder to interpret and not necessarily reflective of the projects required NWCfor example, IBMs cash holdings.)
- To determine the free cash flow, deduct the additional capital investment and the change in net working capital each year.
Template is below
| Assumptions | 2018 Data | ||||||||||||
| Year 1 Sales | 3.0% | of 2018 Sales | Sales | ||||||||||
| EBITDA | EBITDA = Income Before Tax + Interest Expense +Depreciation & amortization | ||||||||||||
| Revenue Growth | 1 | 15.0% | 10.0% | 5.0% | 5.0% | Calculated EBITDA | |||||||
| Base Case | 1 | 15% | 10% | 5% | 5% | Net PPE | |||||||
| Fixed at 0% | 2 | 0% | 0% | 0% | 0% | AR (net receivables) | |||||||
| Fixed at 10% | 3 | 10% | 10% | 10% | 10% | Inventory | |||||||
| Payables | |||||||||||||
| EBITDA/Sales | 20.8% | from 2018 | NWC | ||||||||||
| Cap Ex | 10.0% | 5.0% | of 2018 PPE | ||||||||||
| NWC/Sales | 31.3% | from 2018 | HINT - CHECK | ||||||||||
| Tax Rate | 21.0% | 2018 Data | |||||||||||
| Cost of Capital (WACC) | 12.0% | Sales | 79,590,000 | ||||||||||
| EBITDA | 16,545,000 | ||||||||||||
| Calculated EBITDA | 16,545,000 | ||||||||||||
| Net PPE | 10,793,000 | ||||||||||||
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | AR | 29,820,000 | |||||
| Revenue | Inventory | 1,682,000 | |||||||||||
| yoy growth | Payables | 6,558,000 | |||||||||||
| EBITDA | NWC | 24,944,000 | |||||||||||
| Depreciation | |||||||||||||
| EBIT | |||||||||||||
| Taxes | |||||||||||||
| Net Income | |||||||||||||
| Depreciation | |||||||||||||
| Increase in NWC | |||||||||||||
| CapEx | |||||||||||||
| Free Cash Flow | |||||||||||||
| Discount Factor | |||||||||||||
| Present Value | |||||||||||||
| NPV | |||||||||||||
| IRR | |||||||||||||
| Depreciation Schedule | CapEx | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | ||||||
| CapEx Yr 0 | |||||||||||||
| CapEx Yr 1 | |||||||||||||
| Depreciation | |||||||||||||
| NWC Requirements | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | ||||||
| NWC | |||||||||||||
| Increase in NWC |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
The question is incomplete because the required financial data from IBMs latest fiscal yea...
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Fundamentals Of Corporate Finance
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
13th Edition
1265553602, 978-1265553609
