Cisco Systems Inc. [CSCO], which is located in San Jose, California, manufactures and sells networking and communication products and provides related services. Cisco is a growing company that makes large capital outlays for plant and equipment to produce its inventory. Cisco’s customer base includes corporations, telecommunication corporations, public institutions, and commercial enterprises. Using the Thomson ONE database, analyze from a capital budgeting point of view Cisco’s capital expenditures compared with its cash flows during the past three years. Answer the following questions:
a. What are Cisco’s total cash flows for each of the past three years? (Hint: You can find this information by clicking on Price/Worldscope Market Data/Market Data Snapshot.)
b. How much did Cisco spend on capital expenditures in each of the past three years? (Hint: Click on Financials/Thomson Financial Annual Financial Statements.)
c. If you make the assumption that Cisco’s cost of acquiring capital is 10 percent, determine the present value of the cash flows.
d. Calculate the net present value (NPV) of Cisco’s capital expenditures.
e. Is the NPV positive or negative? What does this result mean for Cisco Systems and its capital budgeting decisions during the past three years Explain.