You've been hired by IBM in the capital budgeting division. Your first assignment is to determine the free cash flows and NPV for a new proposed type of tablet computer similar in size to an IPad but with the operating power of a high-end desktop system. You are handed a report from you boss with the following information on it:

Development of the new tablet computer will initially require a capital expenditure equal to 10% of IBM's Property, Plant, and Equipment (PPE) at the end of the latest fiscal year for which data is available. After the first year, the project will require an additional investment equal to 10% of the initial investment followed by a 5% after the second year and a 1% increase after year three, four, and five. The product is expected to have a shelf life of five years. First-year revenues for the new product 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 project. Your boss has asked you for a four to five page report discussing the following:

1. Forecast the rest of the cash flows associated with the project.
2. Report on the NPV of the project.
3. Perform a sensitivity analysis for the project based on a variety of forecasts.

The following are tips that can be used when completing this assignment:

Forecasting the rest of the cash flows associated with the project. Use IBM's financial statements for part of this question. 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 "financials." To estimate the free cash flow for the new product use equation 8.5 found in Chapter 8. Set up the timeline and computation of free cash flow in separate contiguous columns for each year for the life of the project. Be sure sure to distinguish between outflows and inflows with negatives and positives. Furthermore, use the following assumptions:

1. Assume that the project's profitability will be similar to IBM's existing projects in the latest fiscal year and estimate (revenues - costs) each year by using the latest EBITDA/Sales profit.
2. Determine the annual depreciation by assuming IBM depreciates these assets by the straight-line method over five-years.
3. Determine IBM's tax rate by using the current U.S. federal corporate income tax rate.
4. Calculate the net working capital required each year by assuming that the level of NWC will be an estimate of 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 reflect of the project's required NWC-for example, IBM's cash holdings.)
5. To determine the free cash flow, deduct the additional capital investment and the change in net working capital each year.

Report on the NPV of the project. Determine the NPV of the project with a 12% cost of capital.

Perform a sensitivity analysis. Use the following project forecasts to run sensitivity analysis:

1. Suppose first year sales will equal 2%-4% of IBM's revenues.
2. Suppose the cost of capital is 10-15%.
3. Suppose revenue growth is constant after the first year at a rate of 0%-10%.