You have just been hired by Hewlett-Packard (HP) in its capital budgeting division. Your first

assignment is to determine the net cash flows and NPV of a proposed new type of portable

computer system similar in size to an iPhone, but which has the operating power of a highend desktop system.

Development of the new system will initially require an investment equal to 10% of net

property, plant, and equipment (PPE) for the fiscal year ended October 31, 2020. The

project will then require an additional investment equal to 10% of the initial investment

after the first year of the project, 5% of the initial investment after the second year, and 1%

of the initial investment 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

total revenue for HPs fiscal year ended October 31, 2020. 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 companys products and

that depreciation is straight-line for capital budgeting purposes. Welcome to the real

world. Since your boss hasnt been much help, here are some tips to guide your analysis:

a) Obtain Hewlett-Packards financial statements. Download or copy paste the annual

income statements, balance sheets, and cash flow statements for the last four fiscal

years (2017 2020) from Yahoo finance. Enter Hewlett-Packards ticker symbol (HPQ)

and then go to Financials. Click Annual, to ensure youre getting annual data.

(10 marks)

b) You are now ready to determine the free cash flow. Compute the free cash flow for each

year using the Free Cash Flow formula:

Free Cash Flow = (NOPAT + Depreciation) CAPEX Change in NOWC

Set up the timeline and computation of the free cashflow in separate, contiguous

columns for each year of the project life. Be sure to make outflows negative and inflows

positive.

(5 marks)

i. Assume that the projects cost will be a constant percentage of revenue. To

calculate the cost percentage, use 2020 data by adding up all operating cost (cost of

Revenue, Expenses and R&D) and divide by Revenue.

(5 marks)

ii. Determine the annual depreciation by assuming HP depreciates these assets by the

straight-line method over a 10-year life.

-You are requiere to answer in excel