You have just been hired by Internal Business Machines Corporation $($IBM$)$ in their capital

budgeting division. Your first assignment is to determine the free cash flows and net present value

$($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 IBM's Property, Plant and Equipment $($PPE$)$ at the end of the latest fiscal year $($December

for which data is available. The project will then require an additional investment equal to

$10\%$ of the initial investment 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 IBM's total revenue

for the latest fiscal year $($December $2023)$ for which data is available. The new product's revenues

are expected to grow at $15\%$ for the second year, then $10\%$ for the third year 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. Here are some tips to guide your analysis:

Obtain IBM's financial statements. Download the annual income statements, balance

sheets and cash flow statements for the last four fiscal years from Yahoo! Finance

$($

finance.yahoo.com$).$ Enter IBM's ticker symbol and then go to "financial".

You are now ready to estimate the Free Cash Flow for the new product. Compute the Free

Cash Flow for each year using the equation below: $($Spreadsheet #$1)$

Free Cash Flow $=($ Revenues $-$ Costs $-$ Depreciation $)x(1-Tc)$

$+$ Depreciation $-$ CapE$\frac{-}{{?}_{\frac{?}{?}}}NWC$

Calculate the net working capital required each year by assuming that the level of NWC will be a

constant percentage of the project's sales. Use IBM's NWC$/$Sales for the latest fiscal year

$($December $2023)$ 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 project's required NWC $-$ for

example, IBM's cash holdings.$)$