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

When borrowers go directly to savers for funds, it is called: indirect finance. O direct finance. O security finance. bond finance. Obanking finance.I FOIMS Which term refers to the sale of stocks and bonds to raise money? A. debt finance for stocks and equity finance for bonds OB. debt finance Oc. equity finance for stocks and debt finance for bonds OD. debt-equity financeObservation Salary Position Experience 1 $ 53,938.00 Finance 2 to 5 years 2 $ 52,694.00 Finance 2 to 5 years $ 70,515.00 Non-Finance Less than 2 years 4 $ 52,031.00 Finance 2 to 5 years 5 $ 62,283.00 Non-Finance Less than 2 years $ 57,718.00 Finance ess than 2 years $ 79,081.00 Non-Finance More than 5 years 8 $ 48,621.00 Finance Less than 2 years 9 $ 72,835.00 Non-Finance More than 5 years 10 $ 54,768.00 Finance 2 to 5 years 11 $ 52,282.00 Finance 2 to 5 years 12 $ 55,632.00 Finance Less than 2 years 13 $ 63,856.00 Non-Finance Less than 2 years 14 $ 51,827.00 Finance 2 to 5 years 15 $ 51,948.00 Finance Less than 2 years 16 $ 56,588.00 Finance 2 to 5 years 17 $ 68,858.00 Non-Finance Less than 2 years 18 $ 63,478.00 Non-Finance Less than 2 years 19 $ 83,846.00 Non-Finance 2 to 5 years 20 $ 59,253.00 Finance More than 5 years 21 $ 53,464.00 Finance Less than 2 years 22 $ 83,176.00 Non-Finance 2 to 5 years 23 $ 60,949.00 Finance More than 5 years 24 $ 52,833.00 Finance Less than 2 years 25 $ 72,914.00 Non-Finance More than 5 years 26 $ 83,040.00 Non-Finance 2 to 5 years 27 $ 64,288.00 Non-Finance Less than 2 years 28 $ 64,562.00 Finance More than 5 years 29 $ 52,644.00 Finance More than 5 years 30 $ 55,959.00 Finance Less than 2 years 31 $ 88,730.00 Non-Finance 2 to 5 years 32 $ 77,683.00 Non-Finance 2 to 5 years 33 $ 56,339.00 Finance More than 5 years 34 $ 71,345.00 Non-Finance Less than 2 years 35 $ 63,799.00 Finance Less than 2 years 36 $ 78,074.00 Non-Finance More than 5 years 37 $ 65,546.00 Non-Finance Less than 2 years 38 $ 59,057.00 Finance 2 to 5 years 39 $ 66,024.00 Non-Finance Less than 2 years 40 $ 59,457.00 Finance More than 5 years 41 $ 79,383.00 Non-Finance 2 to 5 years 42 $ 61,128.00 Non-Finance Less than 2 years 43 $ 54,122.00 Finance Less than 2 yearsObservation Salary Position Experience 88 $ 75,791.00 Non-Finance More than 5 years 89 $ 61,680.00 Non-Finance Less than 2 years 90 $ 59,768.00 Finance More than 5 years 91 $ 56,568.00 Finance More than 5 years 92 $ 82,622.00 Non-Finance 2 to 5 years 93 $ 75,326.00 Non-Finance More than 5 years 94 $ 57,719.00 Finance More than 5 years 95 $ 57,366.00 Finance More than 5 years 96 $ 57,670.00 Finance Less than 2 years 97 $ 52,072.00 Finance Less than 2 years 98 $ 68,569.00 Non-Finance More than 5 years 99 $ 81,526.00 Non-Finance 2 to 5 years 100 $ 82,059.00 Non-Finance 2 to 5 years 101 $ 74,374.00 Non-Finance More than 5 years 102 $ 51,119.00 Finance Less than 2 years 103 $ 80,696.00 Non-Finance 2 to 5 years 104 $ 56,352.00 Finance Less than 2 years 105 $ 77,622.00 Non-Finance More than 5 years 106 $ 69,142.00 Non-Finance Less than 2 years 107 $ 67,603.00 Non-Finance More than 5 years 108 $ 60,561.00 Non-Finance Less than 2 years 109 $ 51,246.00 Finance 2 to 5 years 110 $ 54,891.00 Finance Less than 2 years 111 $ 87,090.00 Non-Finance 2 to 5 years 112 $ 55,482.00 Finance More than 5 years 113 $ 53,464.00 Finance Less than 2 years 114 $ 58,568.00 Finance 2 to 5 years 115 $ 58,080.00 Finance More than 5 years 116 $ 78,702.00 Non-Finance 2 to 5 years 117 $ 83,131.00 Non-Finance 2 to 5 years 118 $ 57,788.00 Finance More than 5 years 119 $ 53,070.00 Finance 2 to 5 years 120 $ 60,259.00 Non-Finance Less than 2 yearsObservation Salary Position Experience 44 $ 78,710.00 Non-Finance More than 5 years 45 $ 58,814.00 Finance Less than 2 years 46 $ 59,276.00 Finance Less than 2 years $ 75,869.00 Non-Finance 2 to 5 years 18 $ 57,549.00 Finance 2 to 5 years 49 $ 76,762.00 Non-Finance 2 to 5 years 50 $ 60,993.00 Non-Finance Less than 2 years 51 $ 63,362.00 Finance 2 to 5 years 52 $ 53,231.00 Finance More than 5 years 53 $ 62,115.00 Finance More than 5 years 54 $ 56,080.00 Finance 2 to 5 years 55 $ 53,392.00 Finance 2 to 5 years 56 $ 61,299.00 Non-Finance Less than 2 years 57 $ 53,894.00 Finance More than 5 years 58 $ 82,794.00 Non-Finance 2 to 5 years 59 $ 56,990.00 Finance Less than 2 years 60 $ 77,403.00 Non-Finance More than 5 years 61 $ 78,936.00 Non-Finance More than 5 years 52 $ 54,282.00 Finance 2 to 5 years 53 $ 78,850.00 Non-Finance 2 to 5 years 64 $ 54,592.00 Finance More than 5 years 65 $ 56,461.00 Finance Less than 2 years $ 74,389.00 Non-Finance More than 5 years 57 $ 49,422.00 Finance Less than 2 years $ 86,692.00 Non-Finance 2 to 5 years 69 $ 77,356.00 Non-Finance More than 5 years 70 $ 58,055.00 Finance 2 to 5 years 71 $ 77,820.00 Non-Finance More than 5 years 72 $ 77,801.00 Non-Finance More than 5 years 73 $ 58,053.00 Finance 2 to 5 years 74 $ 78,169.00 Non-Finance 2 to 5 years 75 $ 68,560.00 Non-Finance Less than 2 years 76 $ 66,320.00 Non-Finance More than 5 years 77 $ 67,237.00 Non-Finance Less than 2 years 78 $ 62,225.00 Non-Finance Less than 2 years 79 $ 58,866.00 Finance More than 5 years 80 $ 77,311.00 Non-Finance More than 5 years 81 $ 76,863.00 Non-Finance More than 5 years 82 $ 81,750.00 Non-Finance 2 to 5 years 83 $ 58,749.00 Finance More than 5 years 84 $ 52,638.00 Finance 2 to 5 years 85 $ 62,675.00 Finance 2 to 5 years 86 $ 51,027.00 Finance More than 5 years 87 $ 62,881.00 Non-Finance Less than 2 years