Question:

Your team has just been hired by HP Inc in its capital budgeting division. Your first assignment is to determine the net cash flows and NPV of a proposed new project. HP is planning to develop a new type of smartphone, which should be able to compete with the latest Apple and Samsung models on the market.

Over the last two years, HP has already spent $150 million on R&D to optimise the design of the new smartphone. If the company would decide to actually go ahead with the project, the development and production of the new phone will initially require an investment equal to 42% of the company's current net property, plant and equipment (PPE), as per the fiscal year ended 31 October 2020. The project will then require an additional investment equal to 34% of the initial investment after the first year of the project. The smartphone is expected to have a life of five years. The expectation is that the property, plant and equipment can be sold at the end of the project with a liquidation value of about 10% of the initial investment. The company will borrow $100 million to (partly) finance this project, at an interest rate equal to the average cost of debt of the company.

First-year revenue for the new product is expected to be 3.6% of total revenue for HP's fiscal year ended 31 October 2020. The phone's revenue is expected to grow at 75% for the second year, then 20% for the third, and after that decline by 5% annually for the final two years of the expected life of the product. Your team will have to determine the rest of the cash flows associated with this project. Your boss has indicated that the operating costs of this project will be similar to the rest of the company's products. After the end of the first year the net working capital will have to be adjusted for this project. After that, net working capital will remain at the same level until the end of the project, when the NWC will be re-adjusted to its original values before the start of the project. Your boss has suggested that the increase in accounts payable related to this project, at the end of the first year, will be like the rest of the company's products. However, the inventory requirements and account receivable requirements are expected to be 35% higher compared to the company's other products. Your boss did not say anything about depreciation of the PPE investments, so your team will have to decide on how the company will depreciate the PPE investments for this project. Since your boss hasn't been of much help, here are some tips to guide your analyses:

1) Obtain HP's (ticker code: HPQ) financial statements. Download the annual income statements, balance sheet and cash flow statements for the last four fiscal years. For example, find HP's financial statements on investing.com, and click on Financials. Make sure to get the annual financial statements, instead of the quarterly.

2) You are now ready to determine the free cash flow. Compute the free cash flow for each year. Set up the timeline and computation of the free cash flow in separate columns for each year of the project life. Be sure to make outflows negative and inflows positive.

a. To estimate the annual operating costs of the project, assume, as your boss indicated, that the project's profitability, the ratio of Revenue / Costs (Costs may also be labelled as "Costs of Revenue") will be similar to HP's existing projects in 2020.

b. Determine HP's tax rate by dividing its income taxes by its income before tax in 2020.

c. Determine the change in net working capital attributable to the project by considering the level of inventory, accounts receivable and accounts payable as a percentage of revenues. For example, use HP's 2020 Inventory / Revenues to estimate the required percentages. (Use only accounts receivable, accounts payable and inventory to measure working capital. Other components of current assets and liabilities are harder to interpret and are not necessarily reflective of the projects required net working capital - e.g. HP's cash holdings).

3) Determine HP's weighted average cost of capital (WACC). The CFO of the company computes HP's cost of debt by dividing the yearly interest expenses by the total outstanding long-term debt of the company, and she estimates the firm's cost of equity using the CAPM (as discussed in Week 8). Your team will have to follow this method.

4) Determine the NPV and the IRR of the project

1. Which of the following is true with respect to the separate legal entity characteristic of incorporation? E Shareholders are only exposed to liability if the court "lifts the corporate veil". b. It protects shareholders from liability in all circumstances. C. The purchase and sale of shares can be completed without interfering with the operation of the business. d. It is irrelevant for the purpose of taxation. e. As a corporation is not a natural person, it cannot be convicted of a crime.6. Attendance at births by a health care professional varies widely among countries. For instance, in Bangladesh and Nepal less than 10% of births are attended while in Norway and Belgium it's close to 100%. Mortality also varies greatly, for mothers in childbirth. The table below lists for 12 different countries, percentage of births attended, paired with maternal mortality rate per 100,000 live births. Is there a correlation between mother mortality and attendance at birth by a health care professional? Perform traditional, Pearson correlation in a one-sided test, using R. PERCENTAGE of MORTALITY Rate of births attended mothers per 100,000 births 5 582 24 450 27 195 29 284 40 1010 57 90 70 25 82 61 82 124 87 12 96 11 g9 5 For the x, y data above, the results for Pearson r and one-sided p-value are -, 680452. P = 0.007438(1) b. r . 717865, p = 0.004282(1) C. F -. 7123426, p = 0.004669(1) -.7833992, p = 0.001288(1) er -. 7105142, p = 0.004803(1) -,8050124, p = 0.0007919(1) - . 6787463, p - 0.007614(1) -. 6770479, p = 0.0007793(1) -. 6821648, p = 0.007265(1) -.7141772, p = 0.004537(1) K. F -. 8147158, p = 0.0006243(1) -+7707949, p = 0.00167(1) m. r = -. 7559201, p = 0. 002226(1) n. r -,7952155, p = 0.0009941(1) O. r - -. 6838848, p - 0. 007093(1} p. none of the above 7. In scientific journals, which among the following is the most commonly performed correlation method? a. Spearman b. nonparametric correlation C. partial correlation d. point-biserial correlation e. Kendall f. partial correlation g. Pearson h. multiple correlation 8. Which of the following is true, about Pearson correlation? a. it measures causation b. it is a parametric method c, all of the aboveCase Study Company Law A private limited company, Gemstones Pyt Ltd, is engaged in the business of importing and supplying jewelry as wholesalers to local market. Ali, Ahmed, Sara, Faisal and Amir are the directors of the company. The company decided that the market is becoming more competitive so they need to expand their business. To achieve their target they obtained 4 million rupees loan for the local bank. They spent all the money to increase their business. All the directors of the company did not attend the meetings of the company, Ali and Ahmed are the only ones who participate in the meetings actively. At this time Ali contacted with another retailer of jewelry company, Saad who was looking for a reliable supplier. But he doesn't want to deal with Gemstones PVt Ltd because he doesn't like the managing director Ahmed. Ali did not want to miss this great opportunity so he set up his own business and entered into a contract with Saad without telling other directors of the company. All other members were unaware about this deal. After six months Ali resigned from the director's post because the company became insolvent and could not pay interest on its loans. Important points: 1. The company became insolvent due to expansion and was unable to pay the interest on its loans. 2. Saad was a potential customer of Gemstones Put Ltd. Consider the following: 1. Point out the concepts under Company Law underlying the case study. 2. Ali's course of conduct in the light of Company Law aspect. 3. Other director's liability arising in connection with the loan incurred. Could they avoid the liability under any circumstance? 4. Is Ali liable even though he has resigned from the post of the director? 5. Te legal sanding of Ali's own company running alongside Gemstones Pvt Ltd.1. John Smith had successful business which he wanted to expand and needed extra funding. He was advised by bank that he needed an audit of his business to determine if his present business was profitable. John hired ABC accounting agency to audit his business they we given instructions to determine the level of profit made and if there was any fraudulent activity by staff members. ABC audit revealed that the company was highly profitable and there was no fraud by staff members. John was able get a loan from the bank based on ABC audit report. John experience financial difficulties one year after he received the loan. John a new audit done by XYZ accounting agency for the same period of ABC audit and it revealed that the company was not profitable and that the staff was issuing false invoices. Advise John if he can take any action against ABC