Question
Hi, I was able to solve parts 1-3 but need help solving 4-6. Apple is planning to launch a new easy-to-use kitchen appliance with a
Hi, I was able to solve parts 1-3 but need help solving 4-6.
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 $60 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 $80 million right now and $40 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)?
The initial book value of the factory is: BV0 = 80 + 40 = 120
With linear depreciation over 5 years, the annual depreciation is: Dep. = 120 / 5 = 24 (million)
Answer: 24000000
Part 2. What is the net operating profit after taxes in year 2 (in $ million)?
Year | 0 | 1 | 2 |
Units sold | 1 | ||
* Price | 200 | ||
= Revenue | 200 | ||
- COGS | 60 | ||
- Other expenses | 10 | ||
- Depreciation | 24 | ||
= EBIT | 106 | ||
- Taxes (34%) | 36.04 | ||
= NOPAT | 69.96 |
(in million, except for price)
Answer: 69960000
Part 3. What is the net operating profit after taxes in year 3 (in $ million)?
Year | 0 | 1 | 2 | 3 |
Units sold | 1 | 2 | ||
* Price | 200 | 150 | ||
= Revenue | 200 | 300 | ||
- COGS | 60 | 120 | ||
- Other expenses | 10 | 10 | ||
- Depreciation | 24 | 24 | ||
= EBIT | 106 | 146 | ||
- Taxes (34%) | 36.04 | 49.64 | ||
= NOPAT | 69.96 | 96.36 |
Answer: 96360000
Part 4. What is the incremental cash flow (CF) at the end of year 0 (in $ million)?
??? Need Help. Tried answer = -850000 Not Correct
Part 5. What is the incremental cash flow (CF) at the end of year 1 (in $ million)?
??? Need Help. Tried answer = -42000000 Not Correct
Part 6. What is the incremental cash flow (CF) at the end of year 2 (in $ million)?
??? Need Help. Tried answer = 93960000 Not Correct
Step by Step Solution
There are 3 Steps involved in it
Step: 1
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