h) Consider a residual value of this investment. The residual value consists of a market value of the PPE in last year of the project and the net working capital which can be recovered. Estimate above components of residual value and add to the free cash flow in the last year of your forecast. Calculate the IBM's cost of capital and use it in an analyze or assume that it is equal 8% for this project. Use Excel (or Numbers) to determine the NPV of the project. Also, calculate the IRR and MIRR of the project using IRR and MIRR formulas. Comment the difference between IRR and MIRR you received. Which implicit assumptions did you make in IRR calculation, but not in MIRR? Perform a sensitivity analysis by varying the project forecasts as follows: a. Suppose, the revenues you forecasted in the first year of this project would be higher or lower by 5% or 10%. How may it impact the results you obtained (NPV, IRR, MIRR)? Show your works and comment. b. Suppose, the IBM's cost of capital (or assumed discount rate) would be from -2% lower to +2% higher. Calculate the NPV of the project assuming this range of the discount rates. Show your works and comment. c. Suppose, the revenue growth in the considered project is constant after the first year at a rate of from 0% to 5%. How may it impact the results you obtained (NPV, IRR, MIRR)? Show your works and comment. Let's assume, IBM is going to finance the whole project with debt. How would it impact your calculation? Show your works and comment it. (HINT: Adopt proper discount rate, i.e.: the revised WACC of the investor.) Free Cash Flow = (Revenues - Costs - Depreciation) x (1 Tax rate) + Depreciation - CapEx - ANWC Set up the timeline and computation of free cash flow in separate, contiguous columns for each year of the project life. Be sure to make outflows negative and inows positive. a) b) d) f) 9) Estimate EBITDAs (Revenues Costs) for each year of your forecast by using the IBM's 2021 EBITDA/Sales prot margin, i.e.: find EBITDA in IBM's financial statement directly or calculate it as EBIT + Depreciation, find Revenues, calculate ratio EBITDA/Revenues, assume that the project's profitability in each year of your forecast will be similar to IBM's existing projects in 2021, and calculate EBITDAs for the next 5 years using this ratio. First-year revenues (sales) in forecast for the new product are expected to be equal 4% of IBM's total revenue (sales) for the scal year 2021. The new product's revenues are expected to grow at 15% for the second year then 10% for the third and 5% annually for the final two years (fourth and fth) of the expected life of the project. Determine the annual depreciation by assuming IBM depreciates these assets by the straight-line method over a 5-year life. Remember to depreciate the additional investment (CapEx) as well as the initial investment. Determine IBM's tax rate (effective), i.e.: identify amounts of income taxes paid by IBM and its EBITs in last years, calculate Taxes/EBIT ratios in these years and average, or discuss results and chose the most adequate tax rate (percent). Calculate the net working capital required each year by assuming that the level of the NWC will be a constant percentage of the project's revenues (sales). Use IBM's 2021 NWC/Sales ratio to estimate the required percentage or calculate NWC/Sales ratios in last years, discuss results, average and/or chose the most adequate (percent). Use only accounts receivable, accounts payable, and inventory to measure working capital. Other components of current assets and current liabilities are harder to interpret and not necessarily reective of the project's required NWC - for example, IBM's cash holdings etc. Consider and answer if the NWC (or a change of the NWC) is required at the beginning or at the end of each year? Follow this answer in your spreadsheet's formulas. To determine the free cash flow, calculate the additional capital investment (CapEx) and the change in net working capital each year of your forecast. Jonathan Berk, Peter DeMarzo Data Case for Chapter 8: Fundamentals of Capital Budgeting1 You have just been hired by IBM in their capital budgeting division. Your first assignment is to determine the net cash ows and NPV of a proposed new type of portable computer system similar in size to a tablet but with the operating power of a high-end desktop system. Development of the new system will initially require an initial investment equal to 10% of IBM's net Property, Plant, and Equipment (PPE) at the end of fiscal year 2021. The project will then require an additional investment equal to 10% of initial investment after the rst year of the project, a 5% increase after the second year, and a 1% increase after the third, fourth, and fifth years. The product is expected to have a life of five years. First-year revenues (sales) for the new product are expected to be equal 4% of IBM's total revenue for the fiscal year 2021. The new product's revenues are expected to grow at 15% for the second year then 10% for the third and 5% annually for the final two years of the expected life of the project. Yourjob is to determine the rest of the cash flows associated with this project. Your boss has indicated that the operating costs and net working capital requirements are similar to the rest of the company and that depreciation is straight-line for capital budgeting purposes. Market research suggests that prices of the new product are expected to be similar to current products and will sustain company profits. Welcome to the \"real world." Since your boss hasn't been much help, here are some tips to guide your analysis: 1. Obtain IBM's nancial statements. Download the annual income statements, balance sheets, and cash flow statements for the last fiscal years from FINRA: https:Hfinramarkets.morningstar.com;'MarketData/CompanyInfofdefau|t.jsp. (Enter IBM's ticker symbol, go to \"Financials\