You have just been hired by 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. The project has an expected life of 5 years Development of the new system will initially require an initial capital expenditure equal to 10% of IBMs gross property, plant, and equipment in 2018 (balance sheet). The project will then require an additional capital expenditure investment equal to 10% of the initial investment in the first year of project, a 5% increase after the second year, and a 1% increase after the third, fourth, and fifth years. First-year revenues for the new product are expected to be 3% of IBMs total revenue for 2018 (income statement). The new products revenues are expected to grow at 15% for the second year, 10% for the third, and 5% annually for the final two years of the expected life of the project. Assume that initial capital expenditure incurred in year 0 will be depreciated using a straight line method over a five-year life. Calculate average gross profit margin for 2015-2018 and use it to calculate projects costs. Calculate IBMs average NWC/Sales for 2015-2018 and use it to calculate net working capital required in years 1 through 5 of the project. Calculate average tax expense for 2015-2018 (tax expense/pretax income) and apply it to calculate free cash flows. Calculate free cash flows for years 0-5 of the project If IBMs beta is 1.56, risk free rate is 2%, and return of the market portfolio is 10%, calculate IBMs cost of capital using CAPM Calculate NPV of the project Should IBM take this project?

Should IBM take this project?

12/31/2018 12/31/2017 12/31/2016 12/31/2015 Cash Cash And Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets Total Current Assets 11,379,000,000 11,972,000,000 7,826,000,000 7,686,000,000 618,000,000 608,000,000 701,000,000 508,000,000 29,820,000,000 30,649,000,000 28,188,000,000 27,353,000,000 1,682,000,000 1,583,000,000 1,553,000,000 1,551,000,000 1,000,000 -1,000,000 - 1,000,000 0 49,146,000,000 49,735,000,000 43,888,000,000 42,504,000,000 Gross property, plant and equipment Accumulated Depreciation Net property, plant and equipment Equity and other investments Goodwill Intangible Assets Other long-term assets Total non-current assets Total Assets 32,461,000,000 32,331,000,000 30,134,000,000 29,341,000,000 -21,668,000,000 -21, 215,000,000 -19,303,000,000 -18,616,000,000 10,793,000,000 11,116,000,000 10,831,000,000 10,725,000,000 226,000,000 122,000,000 104,000,000 475,000,000 36,265,000,000 36,788,000,000 36,199,000,000 32,021,000,000 3,088,000,000 3,741,000,000 4,689,000,000 3,486,000,000 296,000,000 572,000,000 729,000,000 571,000,000 74,237,000,000 75,620,000,000 73,584,000,000 67,987,000,000 123,382,000,000 125,356,000,000 117,470,000,000 110,495,000,000 10,207,000,000 6,986,000,000 7,513,000,000 6,461,000,000 6,558,000,000 6,451,000,000 6,209,000,000 6,028,000,000 Total Revenue Accounts Payable Taxes payable Accrued liabilities Deferred revenues Other Current Liabilities Total Current Liabilities 3,941,000,000 4,510,000,000 4,705,000,000 4,353,000,000 11,165,000,000 11,552,000,000 11,035,000,000 11,021,000,000 7,251,000,000 1,000,000 1,000,000 -1,000,000 38,227,000,000 37,363,000,000 36,275,000,000 34,269,000,000 Long Term Debt Deferred taxes liabilities Deferred revenues Other long-term liabilities Total non-current liabilities Total Liabilities 35,605,000,000 39,837,000,000 34,655,000,000 33,428,000,000 3,696,000,000 545,000,000 424,000,000 253,000,000 3,445,000,000 3,746,000,000 3,600,000,000 3,771,000,000 1,719,000,000 1,721,000,000 1,778,000,000 2,063,000,000 68,226,000,000 70,268,000,000 62,803,000,000 61,802,000,000 106,453,000,000 107,631,000,000 99,078,000,000 96,071,000,000