Please do all parts of 1,2, 3, and 4
You work for Apple. After toiling away on $10.9 million worth of prototypes, you have finally produced your answer to Google Glasses: iGlasses (the name alone is genius). Glasses will instantly transport the wearer into the world as Apple wants him to experience it: iTunes with the wink of an eye and apps that can be activated just by looking at them. You think that these will sell for five years until the next big thing comes along (or until users are unable to interact with actual human beings). Revenues are projected to be $447.5 million per year along with expenses of $343.5 million. You will need to spend $63.7 million immediately on additional equipment that will be depreciated using the 5-year MACRS schedule. Additionally, you will use some fully depreciated existing equipment that has a market value of $10.4 million. As the Glasses are an outcome of the R&D center, Apple plans to charge $5 million of the annual costs of the center to the Glasses product for four years. Finally, Apple's working capital levels will increase from their current level of $117.4 million to $137.1 million immediately. They will remain at the elevated level until year 4, when they will return to $117.4 million. Apple's discount rate for this project is 14.7% and its tax rate is 35% Calculate the free cash flows and determine the NPV of this project. (*) The opportunity cost must be after-tax Note: Assume that the equipment is put into use in year 1. ($ million) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Sales $ 0.00 - Cost of Goods Sold $ 0.00 $ Gross Profit $ 0.00 $ - Annual Charge 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 - Depreciation $ $ $ $ $ EBIT - Tax SI Incremental Earnings Depreciation - Incremental Working Capital 0.00 $ 0.00 $ 0.00 $ 0.00 $ - Capital Investment 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ - Opportunity Cost (*) 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Incremental Free Cash Flow $ $ C $ $ SI The NPV of the project is $ million. (Round to two decimal places.) Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $15 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 35% will come from customers who switch to the new, healthier pizza instead of buying the original version. a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? b. Suppose that 54% of the customers who will switch from Pisa Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case? a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? The incremental sales associated with introducing the new pizza will be $ million. (Round to two decimal places.) b. Suppose that 54% of the customers who will switch from Pisa Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case? If 54% of the customers who will switch from Pisa Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza, then the incremental sales will be $_million. (Round to two decimal places.) Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town from its most successful retail outlet. The company already owns the land for this store, which currently has an abandoned warehouse located on it. Last month, the marketing department spent $15,000 on market research to determine the extent of customer demand for the new store. Now Home Builder Supply must decide whether to build and open the new store. Which of the following should be included as part of the incremental earnings for the proposed new retail store? a. The original purchase price of the land where the store will be located b. The cost of demolishing the abandoned warehouse and clearing the lot. c. The loss of sales in the existing retail outlet, if customers who previously drove across town to shop at the existing outlet become customers of the new store instead. d. The $15,000 in market research spent to evaluate customer demand. e. Construction costs for the new store. f. The value of the land if sold. g. Interest expense on the debt borrowed to pay the construction costs. No, this item should not be included as part of the incremental earnings when evaluating the proposal. Yes, this item should be included. Daily Enterprises is purchasing a $9.8 million machine. It will cost $47,000 to transport and install the machine. The machine has a depreciable life of five years using straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.2 million per year along with incremental costs of $1.5 million per year. Daily's marginal tax rate is 35%. You are forecasting incremental free cash flows for Daily Enterprises. What are the incremental free cash flows associated with the new machine? The free cash flow for year 0 will be $ . (Round to the nearest dollar.) The free cash flow for years 1-5 will be $ (Round to the nearest dollar.) You work for Apple. After toiling away on $10.9 million worth of prototypes, you have finally produced your answer to Google Glasses: iGlasses (the name alone is genius). Glasses will instantly transport the wearer into the world as Apple wants him to experience it: iTunes with the wink of an eye and apps that can be activated just by looking at them. You think that these will sell for five years until the next big thing comes along (or until users are unable to interact with actual human beings). Revenues are projected to be $447.5 million per year along with expenses of $343.5 million. You will need to spend $63.7 million immediately on additional equipment that will be depreciated using the 5-year MACRS schedule. Additionally, you will use some fully depreciated existing equipment that has a market value of $10.4 million. As the Glasses are an outcome of the R&D center, Apple plans to charge $5 million of the annual costs of the center to the Glasses product for four years. Finally, Apple's working capital levels will increase from their current level of $117.4 million to $137.1 million immediately. They will remain at the elevated level until year 4, when they will return to $117.4 million. Apple's discount rate for this project is 14.7% and its tax rate is 35% Calculate the free cash flows and determine the NPV of this project. (*) The opportunity cost must be after-tax Note: Assume that the equipment is put into use in year 1. ($ million) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Sales $ 0.00 - Cost of Goods Sold $ 0.00 $ Gross Profit $ 0.00 $ - Annual Charge 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 - Depreciation $ $ $ $ $ EBIT - Tax SI Incremental Earnings Depreciation - Incremental Working Capital 0.00 $ 0.00 $ 0.00 $ 0.00 $ - Capital Investment 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ - Opportunity Cost (*) 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Incremental Free Cash Flow $ $ C $ $ SI The NPV of the project is $ million. (Round to two decimal places.) Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $15 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 35% will come from customers who switch to the new, healthier pizza instead of buying the original version. a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? b. Suppose that 54% of the customers who will switch from Pisa Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case? a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? The incremental sales associated with introducing the new pizza will be $ million. (Round to two decimal places.) b. Suppose that 54% of the customers who will switch from Pisa Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case? If 54% of the customers who will switch from Pisa Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza, then the incremental sales will be $_million. (Round to two decimal places.) Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town from its most successful retail outlet. The company already owns the land for this store, which currently has an abandoned warehouse located on it. Last month, the marketing department spent $15,000 on market research to determine the extent of customer demand for the new store. Now Home Builder Supply must decide whether to build and open the new store. Which of the following should be included as part of the incremental earnings for the proposed new retail store? a. The original purchase price of the land where the store will be located b. The cost of demolishing the abandoned warehouse and clearing the lot. c. The loss of sales in the existing retail outlet, if customers who previously drove across town to shop at the existing outlet become customers of the new store instead. d. The $15,000 in market research spent to evaluate customer demand. e. Construction costs for the new store. f. The value of the land if sold. g. Interest expense on the debt borrowed to pay the construction costs. No, this item should not be included as part of the incremental earnings when evaluating the proposal. Yes, this item should be included. Daily Enterprises is purchasing a $9.8 million machine. It will cost $47,000 to transport and install the machine. The machine has a depreciable life of five years using straight-line depreciation and will have no salvage value. The machine will generate incremental revenues of $4.2 million per year along with incremental costs of $1.5 million per year. Daily's marginal tax rate is 35%. You are forecasting incremental free cash flows for Daily Enterprises. What are the incremental free cash flows associated with the new machine? The free cash flow for year 0 will be $ . (Round to the nearest dollar.) The free cash flow for years 1-5 will be $ (Round to the nearest dollar.)
