You have been hired by Internal Business Machines Corporation (IBM) in their capital budgeting division. Your first assignment is to determine the 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 IBMs Net Property, Plant, and Equipment (PPE) at the end of the latest fiscal year for which data is available (year 0). The project will then require an additional investment equal to 50% of the initial capital expenditure in the first year of the project (year 1). The product is expected to have a life of five years. First-year revenues for the new product are expected to be 3% of IBMs total revenue for the latest fiscal year for which data is 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 expected life of the project. Your job is to determine the rest of the cash flows associated with this project. Your boss 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. Compute the Free Cash Flow for each year. a. Assume that the projects profitability will be similar to IBMs existing projects in the latest fiscal year and estimate (revenues - costs) each year by using the latest EBITDA/Sales profit margin. Calculate EBITDA as EBIT + Depreciation expense from the cash flow statement. b. Determine the annual depreciation by assuming IBM depreciates these assets by the straight-line method over a five-year life. c. 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 components of current assets and liabilities are harder to interpret and not necessarily reflective of the projects required NWCfor example, IBMs cash holdings.) d. To determine the free cash flow, deduct the additional capital investment and the change in net working capital each year. 2 Determine the NPV and the IRR of the project calculated using Excels IRR function under different assumptions about first year sales, cost of capital, and revenue growth (sensitivity analysis). Report your results by choosing the option presented in the following multiple choice questions (Base case) First year sales are 3%, the cost of capital is 12%, and revenue growth is option 1 in the C6 cell, The NPV and IRR are closest to: [A] 51,543; 13.2% [B] 30,767; 12.5% [C] 41,643; 15.2% [D] 63,496; 16.8% First year sales are 2%, the cost of capital is 12%, and revenue growth is option 1 in the C6 cell. The NPV and IRR are closest to: [A] -421,080; 4.2% [B] -361,280; 5.3% [C] -241,286; 6.1% [D] -31,423; 7.3% First year sales are 4%, the cost of capital is 12%, and revenue growth is option 1 in the C6 cell. The NPV and IRR are closest to: [A] 343,678; 16.8% [B] 482,614; 18.8% [C] 550,856; 20.8% [D] 601,678; 22.4% First year sales are 3%, the cost of capital is 10%, and revenue growth is option 1 in the C6 cell. The NPV and IRR are closest to: [A] 201,453; 13.6% [B] 165,383; 12.5% [C] 101,423; 11.6% [D] 95,622; 9.8% First year sales are 3%, the cost of capital is 15%, and revenue growth is option 1 in the C6 cell. The NPV and IRR are closest to: [A] -145,516; 12.5% [B] 103,060; 11.1% [C] 99,301; 10.0% [D] 81,345; 8.7% 3 First year sales are 3%, the cost of capital is 12%, and revenue growth is option 2 in the C7 cell (fixed at 0%). The NPV and IRR are closest to: [A] -200,305; 8.3% [B] -136,657; 9.6% [C] -103,567; 7.9% [D] - 45,356; 5.1% First year sales are 3%, the cost of capital is 12%, and revenue growth is option 3 in the C8 cell (fixed at 10%). The NPV and IRR are closest to: [A] 21,115; 12.9% [B] 18,957; 12.3% [C] 11,652; 10.4% [D] 8,456; 7.3%

All Assumptions are collected in the panel below

2. The data to retrieve from the Statements worksheet need to be reported in Assumptions Year 1 Sales 3.0% of 2018 Sales Revenue Growth 1 15.0% 10.0% 5.0% 5.0% Base Case 1 15% 10% 5% 5% Fixed at 0% 2 0% 0% 0% 0% Fixed at 10% 3 10% 10% 10% 10% EBITDA/Sales 20.8% from 2018 Cap Ex 10.0% 5.0% of 2018 PPE NWC/Sales 31.3% from 2018 Tax Rate 21.0% Cost of Capital (WACC) 12.0% 2018 Data Sales From Statements EBITDA From Statements Calculated EBITDA same as EBITDA in K4 PPE Net property, plant and equipment AR Net receivables I9 Inventory Inventory Payables Accounts payable NWC AR+Inventory-Payable

Notes on the Excel File 1. All Assumptions are collected in the panel below Assumptions Year 1 Sales 3.0% of 2018 Sales 1 Revenue Growth Base Case Fixed at 0% Fixed at 10% 15.0% 15% 0% 10% 10.0% 10% 0% 10% 5.0% 5% 0% 10% 5.0% 5% 0% 10% EBITDA/Sales Cap Ex INWC/Sales Tax Rate Cost of Capital (WACC) 20.8% from 2018 10.0% 5.0% of 2018 PPE 31.3% from 2018 21.0% 12.0% 2. The data to retrieve from the Statements worksheet need to be reported in 2018 Data Sales EBITDA Calculated EBITDA IPPE JAR Inventory Payables INWC From Statements From Statements same as EBITDA in K4 Net property, plant and equipment Net receivables 19 Inventory Accounts payable AR+Inventory-Payables