PO MOLE Search File Home Insert Draw Page Layout Formulas Data Review View Developer Help QuickBooks Times New Roman 14 Number aste X Cut LL Copy Format Painter Clipboard - A A 2 Wrap Text a A Merge & Center BIUBB $ % 9 06 - Conditional Formatting Font Alignment Number 24 FAX G J 8 D HE You work for Apple. After toiling away on $10 million worth of prototypes, you have finally produced your answer to Google Glasses Glasses (the name alone is genius) Glasses will instantly transport the wearer into the world as Apple wants you 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 5 years until the next big thing comes along (or until the users are unable to interact with actual human beings) Revenues are projected to be $450 million per year along with expenses of S350 million. You will need to spend 560 million immediately on additional equipment that put into use in year 1 and 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 million. As the Glasses are an outcome of the R&D center, Apple thinks it should charge $5 million of the annual costs of the center to the Glasses product for 5 years. Finally, Apple's working capital levels will increase from their current level of S120 million to $140 million immediately They will remain at the elevated level until year 5, when they will return to $120 million. Apple's discount rate for this project is 15% and its tax rate is 35%. Calculate the free cash flows and determine the NPV of this project I ear 0 1 2 3 4 6 Depreciation MACRS Schedule Depreciation (in Millions) NPV 20.00% 12.0 32.00% 19.2 19.20% 11.5 11.52% 6.9 11.52% 6.9 5.76% 3.5 Year Without Project 0 1 3 4 5 Change in NWC Net Working Capital Change in NWC Cash Flow 120 140 140 20 20 140 0 0 1 140 O 0 140 0 0 U 0 120 -20 20 14 15 6 17 18 20 21.1 22 23 24 Year 0 Reveres Costs Depreciation Taxable income " Tax Net Income Add back Depreciation Capex -60.0 Opportunity Cost 6.5 ... 9-12 9-139-14 917 918 9-279-28 1 450.0 350.0 12.0 58.0 18.5 69.5 12.0 2 450.0 350.0 -19.2 80.8 17.0 63.8 19.2 3 450.0 350.0 11.5 88.5 18.6 69.9 11.5 4 450.0 350.0 6.9 93.1 19.5 73.5 6.9 5 450.0 350.0 -6.9 93.1 19.5 73.5 6.9 0.0 0.0 3.5 3.5 0.7 2.7 3.5 9-29 930 9-31 9-32 9-33 Scenario Summary LO Type here to search At 9 utoSave Off B CH09_SM_5e_Student - Compatibility Mode Search 8 Page Layout Home Insert Draw Formulas Data Review View Developer Help QuickBooks Times New Roman 14 - A A 2 Wrap Text Number 1 X Cut L Copy Format Painter BIU A Merge & Center $ % 98 Conditional For Formatting Clipboard Font Alignment Number Sty A B D E F G J K Year 0 2 3 4 5 6 Depreciation MACRS Schedule Depreciation (in Millions) NPV 20.00% 12.0 32.00% 19.2 19.20% 11.5 11.52% 6.9 11.52% 6.9 5.76% 3.5 Year Without Project 0 1 2 3 4 5 Change in NWC Net Working Capital Change in NWC Cash Flow 120 140 140 20 20 140 0 0 140 0 140 0 U U 20 20 20 UN 0 Year 0 5 6 4 450.0 3 450.0 350.0 11.5 350.0 Revenues Costs Depreciation Taxable Income Tax Net Income Add back Depreciation CapEx Opportunity Cost CF from Change NWC FCF 1 450.0 350.0 12.0 88.0 18.5 69.5 120 2 450.0 350.0 -19.2 80.8 17.0 63.8 19.2 88.5 18.6 69.9 11.3 6.9 93.1 19.5 73.5 6.9 450.0 350.0 6.9 93.1 19.5 73.5 6.9 0.0 0.0 3.5 3.5 0.7 -2.7 3.5 O 60.0 6.5 -20.0 0.0 0.0 0.0 0.0 20.0 0.0 NPV C 9-12 9-13 9-14 179 18 9-279-28 9-29 1930 9-31 9-32 9-33 Scenario Summary Type here to search PO MOLE Search File Home Insert Draw Page Layout Formulas Data Review View Developer Help QuickBooks Times New Roman 14 Number aste X Cut LL Copy Format Painter Clipboard - A A 2 Wrap Text a A Merge & Center BIUBB $ % 9 06 - Conditional Formatting Font Alignment Number 24 FAX G J 8 D HE You work for Apple. After toiling away on $10 million worth of prototypes, you have finally produced your answer to Google Glasses Glasses (the name alone is genius) Glasses will instantly transport the wearer into the world as Apple wants you 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 5 years until the next big thing comes along (or until the users are unable to interact with actual human beings) Revenues are projected to be $450 million per year along with expenses of S350 million. You will need to spend 560 million immediately on additional equipment that put into use in year 1 and 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 million. As the Glasses are an outcome of the R&D center, Apple thinks it should charge $5 million of the annual costs of the center to the Glasses product for 5 years. Finally, Apple's working capital levels will increase from their current level of S120 million to $140 million immediately They will remain at the elevated level until year 5, when they will return to $120 million. Apple's discount rate for this project is 15% and its tax rate is 35%. Calculate the free cash flows and determine the NPV of this project I ear 0 1 2 3 4 6 Depreciation MACRS Schedule Depreciation (in Millions) NPV 20.00% 12.0 32.00% 19.2 19.20% 11.5 11.52% 6.9 11.52% 6.9 5.76% 3.5 Year Without Project 0 1 3 4 5 Change in NWC Net Working Capital Change in NWC Cash Flow 120 140 140 20 20 140 0 0 1 140 O 0 140 0 0 U 0 120 -20 20 14 15 6 17 18 20 21.1 22 23 24 Year 0 Reveres Costs Depreciation Taxable income " Tax Net Income Add back Depreciation Capex -60.0 Opportunity Cost 6.5 ... 9-12 9-139-14 917 918 9-279-28 1 450.0 350.0 12.0 58.0 18.5 69.5 12.0 2 450.0 350.0 -19.2 80.8 17.0 63.8 19.2 3 450.0 350.0 11.5 88.5 18.6 69.9 11.5 4 450.0 350.0 6.9 93.1 19.5 73.5 6.9 5 450.0 350.0 -6.9 93.1 19.5 73.5 6.9 0.0 0.0 3.5 3.5 0.7 2.7 3.5 9-29 930 9-31 9-32 9-33 Scenario Summary LO Type here to search At 9 utoSave Off B CH09_SM_5e_Student - Compatibility Mode Search 8 Page Layout Home Insert Draw Formulas Data Review View Developer Help QuickBooks Times New Roman 14 - A A 2 Wrap Text Number 1 X Cut L Copy Format Painter BIU A Merge & Center $ % 98 Conditional For Formatting Clipboard Font Alignment Number Sty A B D E F G J K Year 0 2 3 4 5 6 Depreciation MACRS Schedule Depreciation (in Millions) NPV 20.00% 12.0 32.00% 19.2 19.20% 11.5 11.52% 6.9 11.52% 6.9 5.76% 3.5 Year Without Project 0 1 2 3 4 5 Change in NWC Net Working Capital Change in NWC Cash Flow 120 140 140 20 20 140 0 0 140 0 140 0 U U 20 20 20 UN 0 Year 0 5 6 4 450.0 3 450.0 350.0 11.5 350.0 Revenues Costs Depreciation Taxable Income Tax Net Income Add back Depreciation CapEx Opportunity Cost CF from Change NWC FCF 1 450.0 350.0 12.0 88.0 18.5 69.5 120 2 450.0 350.0 -19.2 80.8 17.0 63.8 19.2 88.5 18.6 69.9 11.3 6.9 93.1 19.5 73.5 6.9 450.0 350.0 6.9 93.1 19.5 73.5 6.9 0.0 0.0 3.5 3.5 0.7 -2.7 3.5 O 60.0 6.5 -20.0 0.0 0.0 0.0 0.0 20.0 0.0 NPV C 9-12 9-13 9-14 179 18 9-279-28 9-29 1930 9-31 9-32 9-33 Scenario Summary Type here to search