The (IBM) free cash flows and 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 10% of IBM's Property, Plant, and Equipment (PPE) at the end of the latest fiscal year for which data is available. The project will then require an additional investment equal to 10% of the initial investment after the first year of the project, a 5% increase after the second year, and a 1% increase after the third, fourth, and fifth years. The product is expected to have a life of five years. First-year revenues for the new product are expected to be 3% of IBM's total revenue for the latest fiscal year for which data is available. The new product's 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 expected life of the project.The rest of the cash flows associated with this project.The operating costs and net working capital requirements are like the rest of thecompany and that depreciation is straight-line for capital budgeting purposes:

1. Compute the Free Cash Flow for each year using

UnleveredNetIncome

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.

1. Assume that the project's profitability will be like IBM's existing projects in the latest fiscal year and estimate(revenuescosts) (revenuescosts)each year by using the latest EBITDA/Sales profit margin. Calculate EBITDA asEBIT+DepreciationEBIT+Depreciationexpense from the cash flow statement.
2. Determine the annual depreciation by assuming IBM depreciates these assets by the straight-line method over a five-year life.
3. Determine IBM's tax rate by using the current U.S. federal corporate income tax rate.
4. Calculate the net working capital required each year by assuming that the level of NWC will be a constant percentage of the project's sales. Use IBM's 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 components of current assets and liabilities are harder to interpret and not necessarily reflective of the project's required NWCfor example, IBM's cash holdings.)
5. To determine the free cash flow, deduct the additional capital investment and thechangein net working capital each year.
6. Use Excel to determine the NPV of the project with a 12% cost of capital. Also calculate the IRR of the project using Excel's IRR function.
7. Perform a sensitivity analysis by varying the project forecasts as follows:
8. Suppose first year sales will equal 2%-4% of IBM's revenues.
9. Suppose the cost of capital is 10%-15%.
10. Suppose revenue growth is constant after the first year at a rate of 0%-10%.

INTERNATIONAL BUSINESS MACHINES CORP (IBM) Statement of CASH FLOW

.12/31/201812/31201712/31/201612/31/2015TTM

Cash Flows from Operating Activities

Net income8,728,0005,753,00011,872,00013,190,0007,712,000.00

Depreciation & amortize 4,480,0004,541,0004,381,0003,855,0005,521,000.00

Deferred income taxes853,000 -931,000 -1,132,0001,387,000

Stock based comp510,000 534,000 544,000 468,000 607,000

Change in WC554,000 6,813,0001,231,000-2,444,000604,000

Account receivable-345,000 419,0001,218,000200,000

Inventory-127,000 18,000-14,000133,000

Account Payable 126,00047,000197,00081,000

Other working capital11,283,00012,951,00012,808,00012,857,00012,780,000

Other non-cash items-1,0001,000544,000 -200,000

Net cash by operating15,247,00016,724,00016,958,00017,008,00015.438,000

Cash flows from investing activities

Invest in property, plant,& -3,964,000-3,773,000-4,150,000-4,151,000-2,658,000

Acquisitions, net-139,000 -701,000 -6,133,000-3,750,000-32,646,000

Purchases of investments-7,041,000-4,964,000-5,917,000-3,073,000

Sales/Maturities of investments6,487,0003,910,0005,692,0002,842,000

Other investing activities-504,000 -2,028,000-892,000 -397,000 -882,000

Net cash used for investing activities-4,913,000-7,096,000-10,976,000-8,159,000-26,609,000

Cash flows from financing activities

Debt repayment-8,533,000-6,816,000-6,395,000-5,622,000

Common stock issued204,000 322,000

Common stock repurchased-4,614,000-4,533,000-3,502,000-4,609,000-3,434,000

Dividend paid-5,666,000-5,506,000-5,256,000-4,897,000-5,685,000

Other financing activities112,000 174,000 204,000 321,000 -89,000

Net cash used provided by (used for financing activities-10,470,000-6,417,000-5,791,000-9,165,00010,112,000

Net change in cash-630,000 4,146,000140,000 -790,000 -1,506,000

Cash at the beginning of period12,234,0007,826,0007,686,0008,476,00011,731,000

Cash at end of period11,604,00011,972,0007,826,0007,686,000

Free Cash Flow

Operating Cash Flow15,247,00016,724,00016,958,00017,008,00015,438,000

Capital Expenditure-3,964,000-3,773,000-4,150,000-4,151,000-2,658,000

Free Cash Flow11,283,00012,951,00012,808,00012,857,00012,780,000

INTERNATIONAL BUSINESS MACHINES CORP (IBM) INCOME STATEMENT

BreakdownTTM12/31/201812/31/201712/31/201612/31/2015

Total Revenue77,131,00079,590,00079,139,00079,920,00081,742,000

Cost of revenue41,055,00042,655,00042,913,00041,625,00041,057,000

Gross profit36,075,00036,936,00036,227,00038,294,00040,684,000

Operating expenses

Research development5,751,0005,379,0005,787,0005,751,0005,247,000

Selling General and administrative19,754,00018,863,00019,555,00020,479,00019,894,000

Total operating expenses24,938,00023,651,00024,372,00025,102,00024,763,000

Operating Income or Loss 11,137,00013,285,00011,855,00013,192,00015,921,000

Interest Expense1,183,000723,000 615,000 630,000 468,000

Total Other income Expenses Net578,000 -1,482,00017,000-339,000 421,000

Income before taxes10,607,00011,342,0011,400,00012,330,00015,945,000

Income Tax Expenses2,888,0002,619,0005,642,000449,000 2,581,000

Income from continuing operations 7,719,0008,723,0005,758,00011,881,00013,364,000

Net income7,712,0008,728,0005,753,00011,872,00013,190,000

Net income available to common shareholders7,712,0008,728,0005,753,00011,872,0013,190,000

Reported Earnings per share

Basic9.576.1712.4313.48

Diluted9.526.1412.3813.42

Weighted average shares outstanding

Basic912,000 932,800 955,400 978,700

Diluted916,300 937,400 958,700 982,700

EBITDA16,545,00016,556,00017,341,00020,268,000

INTERNATIONAL BUSINESS MACHINES CORP (IBM) BALANCE SHEET

12/31/201812/31/201712/31/201612/31/2015

Assets

Current assets

Cash

Cash and cash equivalents 11,379,00011,972,0007,826,0007,686,000

Short-term investments618,000 608,000 701,000 508,000

Total cash11,997,00012,580,0008,527,0008,194,000

Net Receivables29,820,00030,649,00028,188,00027,353,000

Inventories1,682,0001,583,0001,553,0001,551,000

Other current assets1,000-1,000-1,0000

Total current assets49,146,00049,735,00043,888,00042,504,000

Non-current assets

Property, plant and equipment

Gross property, plant and equipment32,461,00032,331,00030,134,00029,341,000

Accumulated Depreciation -21,668,000-21,215,000-19,303,000-18,616,000

Net property, plant and equipment10,793,00011,116,00010,831,00010,725,000

Equity and other investments226,000 122,000 -19,303,000475,000

Goodwill36,265,0003118410,831,000320,210,000

Intangible assets3,088,0003,741,0004,689,0003,486,000

Other long-term assets296,000 572,000 729,000 571,000

Total non-current assets74,237,00075,620,00073,584,00067,987,000

Total assets119213125,356,000117,470,000110,495,000

Liabilities and stockholders' equity

Liabilities

Current liabilities

Total Revenue10,207,0006,986,0007,513,0006,461,000

Accounts payable 6,558,0006,451,0006,209,0006,028,000

Taxes payable

Accrued liabilities3,941,0004,510,0004,705,0004,363,000

Deferred revenues11,165,00011,552,00011,035,00011,021,000

Other current liabilities7,251,0001,0001,000-1,000

Total current liabilities38,227,00037,363,00036,275,00034,269,000

Non-current liabilities

Long-term debt35,605,00039,837,00034,655,00033,428,000

Deferred taxes liabilities3,696,000545,000 424,000 253,000

Deferred revenues3,445,0003,746,0003,600,0003,771,000

Other long-term liabilities1,719,0001,721,0001,778,0002,063,000

Total non-current liabilities68,226,00070,268,00062,803,00061,802,000

Total liabilities106,453,000107,631,00099,078,00096,071,000

Stockholders' equity

Common stock55,151,00054,566,00053,935,00053,262,000

Retained earnings159,206,000153,126,000152,759,000146,124,000

Accumulated other comprehensive income-29,490,000-26,592,000-29,398,000-29,607,000

Total stockholders' equity16,796,00017,594,00018,246,00014,262,000

Total liabilities and stockholders' equity123,382,000125,356,000117,470,000110,495,000