You have just been hired by Intel in its finance division. Your first assignment is to determine the net cash flows and NPV of a proposed new generation of mobile chips. Capital expenditures to produce the new chips will initially require an investment of $1.2 billion. The R&D that will be required to finish the chips is $500 million this year. Any ongoing R&D for upgrades will be covered in the margin calculation in 2a below. The product family is expected to have a life of five years. First-year revenues for the new chip are expected to be $2,000,000,000 ($2,000 million). The chip family’s revenues are expected to grow by 20% for the second year, and then decrease by 10% for the third, decrease by 20% for the 4th and finally decrease by 50% for the 5th (final) year of sales. 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’s products. Since your boss hasn’t been much help, here are some tips to guide your analysis:
1. Obtain Intel’s financial statements. Download the annual income statements and balance sheets for the last four fiscal years from Morningstar (www.morningstar.com). Enter Intel’s ticker symbol (INTC) and then go to “Financials”, then click “All Financials Data.” Click “Annual,” to ensure you’re getting annual, instead of quarterly, data. Next, export the income statements and balance sheets into Excel.
2. You are now ready to determine the free cash flow. Compute the free cash flow for each year using Eq. 9.6 from this chapter:

Set up the timeline and computation of the free cash flow in separate, contiguous columns for each year of the project life. Be sure to make outflows negative and inflows positive.
a. Assume that the project’s profitability will be similar to Intel’s existing projects in the most recent fiscal year and estimate costs each year by using the most recent annual ratio of non depreciation costs to revenue: [1Cost of Revenue + SG&A + R&D2/ Total Revenue]You should assume that this ratio will hold for this project as well. You do not need to break out the individual components of operating costs in your forecast. Simply forecast the total of Cost of Revenue + SG&A + R&D for each year.
b. Determine the annual depreciation by assuming Intel depreciates these assets by the straight-line method over a 5-year life.
c. Assume Intel’s tax rate is 25%.
d. 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 Intel’s most recent annual NWC/Sales 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 are not necessarily reflective of the project’s required NWC—e.g., Intel’s cash holdings.)
e. To determine the free cash flow, calculate the additional capital investment and the change in net working capital each year. 4. Determine the IRR of the project and the NPV of the project at a cost of capital of 12% using the Excel functions. For the calculation of NPV, include cash flows 1 through 5 in the NPV function and then subtract the initial cost (i.e., = NPV1rate, CF1CF52 + CF02. For IRR, include cash flows 0 through 5 in the cash flow range.

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Unlevered Net Income Free Cash Flow = (Revenues - Costs - Depreciation) x (1 - Tax Rate) + Depreciation - CapEx Change in NWC