Homework 2A:

Proforma Income Statement The purpose of this assignment is to estimate the cash flows from a project. Later in the semester, well return to this project and use the tools of capital budgeting to determine if the project is desirable. Here, we simply want to work through a proforma income statement to determine the cash flows from the project. Below are some estimates that the marketing department has determined. Other assumptions necessary for completing the proforma income statement can be found by looking at some of the historical averages of values in Ciscos financial statements.

Suppose Cisco (ticker symbol - csco) has decided to introduce a new high speed router, the Cheetah. Before they launch the Cheetah, they conducted an analysis to see if the Cheetah would be a desirable investment. The company estimated that it would sell 10 million Cheetahs per year at a price of $250 for the next six years. After the first year of sales, the quantity sold will increase by 3% per year for the remaining life of the project. The initial capital outlay is determined to be $2.5 billion and a $500 million outlay in net working capital (NWC) would also be required. Assume that there is a one-time investment in NWC and that this will be recovered at the end of the project.

Assume that the equipment used will be depreciated using the MACRS 7 year schedule and that the equipment has a salvage value of zero. At the end of year 6, the equipment will be sold for its book value. Also, assume that that the tax rate is 25%. Using information from Ciscos financial statements (you may want to use Morningstar.com or some other online site) estimate the operating cash flows from the project. Make any simplifying assumptions that are necessary to produce the estimate.