Intro

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 $$70$ million investment right now

and will take one year to complete. The factory has a $5-$year tax life after completion and

is depreciated straight to zero. However, Apple expects to be able to sell the factory at

the end of the project for $$56$ million.

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.

Assume the project is of approximately the same risk as the firm's existing operations.

The firm's marginal tax rate is $34\%.$ The following data are current:

Stock:

$9$ million shares outstanding, price per share is $$246,$ beta $=1\mathrm{.}4$

Bond:

Book value of $$600$ million, face value of $$1,000,5\%$ coupon, paid semi$-$annually, $20$

years to maturity, currently priced at $$884\mathrm{.}43,$ implying a YTM of $6\%.$

Market:

Treasury bills have a return of $1\%$ and the market risk premium $($MRP$)$ is $8\mathrm{.}5\%.$

$1.$ What is the after tax salvage value of the factory when it is solg $($in $ million$)?$

$2.$ What is the cash flow from assets at the end of the year $3($In$ million$)?$

$3.$ What is the NPV of this project $($in $ million$)?$