You have been hired by Internal Business Machines Corporation (IBM) in their capital budgeting division. Your first
Question:
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 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 in-vestment 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 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.
Use the template provided in the attached Spreadsheet
4. Perform a sensitivity analysis by varying the project forecasts as follows:
a. Suppose first year sales will equal 2%4% of IBMs revenues.
b. Suppose the cost of capital is 10%15%.
c. Suppose revenue growth is constant after the first year at a rate of 0%10%
Advanced Accounting
ISBN: 9781260247824
14th Edition
Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik