The consulting firm you work for on your work term just signed up a new client, International Business Machines Corporation (IBM). Your supervisor is now in charge of this account, so we will be busy helping her. Your first assignment is to determine the free cash flows and net present value (NPV) of a proposed new type of tablet computer similar in size to an iPad but with the operating power of a high-end desktop system. Development of the new system will initially require an initial capital expenditure equal to 1% of IBMs Property, Plant, and Equipment (PPE) at the end of the latest fiscal year for which data are available. The project will then require an additional investment equal to 10% of the initial investment in the project's first year and 5% of the initial investment in the second year. The product is expected to have a life of five years. First-year revenues for the new product are expected to be 5% of IBMs total revenue for the latest fiscal year for which data are available. The new products revenues are expected to grow at 15% for the second year, then 10% for the third and 5% annually for the final two years of the project's expected life. Your job is to determine the rest of the cash flows associated with this project. Your supervisor has indicated that the operating costs and net working capital requirements are similar to the rest of the company and that depreciation is straight-line for capital budgeting purposes. 1. Obtain IBMs financial statements. Your supervisor recommended downloading the latest annual income statements, balance sheets, and cash flow statements from Yahoo! Finance (finance.yahoo.com). Enter IBMs ticker symbol and then go to Financials. 2. Estimate the Free Cash Flow for the new product. Compute the Free Cash Flow for each year using the following equation: Where is the corporate tax rate, is the capital expenditure, and NWC is the change in net working capital. Set up the timeline and computation of free cash flow in separate, contiguous columns for each year of the project life. Be sure to make outflows negative and inflows positive. Assume that the projects profitability will be similar to IBMs existing projects in the latest fiscal year and estimate (revenues costs) each year using the latest Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)/Sales profit margin. Calculate the EBITDA as Earnings Before Taxes (EBIT) + Depreciation and Amortization expense from the cash flow statement. Determine the annual depreciation by assuming IBM depreciates these assets by the straight-line method over five years. Determine IBMs tax rate using the current U.S. federal corporate income tax rate. Calculate the net working capital required each year by assuming that the level of NWC will be a constant percentage of the projects sales. Use IBMs NWC/Sales for the latest fiscal year to estimate the required percentage. (Use only accounts receivable, accounts payable and inventory to measure working capital. Other current assets and liabilities components are harder to interpret and not necessarily reflective of the required NWC for this project.) To determine the free cash flow, deduct the additional capital investment and the change in net working capital each year. 3. Calculate the NPV of the project with a 12% cost of capital. Next, calculate the project's internal rate of return (IRR). 4. Perform a sensitivity analysis by varying the project forecasts as follows: Suppose first-year sales will equal 4%6% of IBMs revenues. Suppose the cost of capital is 10%15%. Suppose revenue in the first year ranges from 3%7% of IBMs total revenue