You have just been hired by Internal Business Machines Corporation (IBM) in their capital budgeting division....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
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 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 fiscal year 2014. 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, fourch, 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 fiscal year 2014. The new product's revenues 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 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. Since your boss hasn't been much help (welcome to the "real world"!), here are some tips to guide your analysis: 1. Obtain IBM's financial statements. (If you really worked for IBM you would already have this data, but at least you won't get fired if your analysis is off target.) 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." 2. You are now ready to estimate the Free Cash Flow for the new product. Compute the Free Cash Flow for each year using Eq. 8.5: Unlevered Net Income Free Cash Flow= (Revenues - Costs - Depreciation) x (1- 7) + Depreciation - CapEx - ANWC 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 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 fiscal year 2014. 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, fourch, 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 fiscal year 2014. The new product's revenues 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 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. Since your boss hasn't been much help (welcome to the "real world"!), here are some tips to guide your analysis: 1. Obtain IBM's financial statements. (If you really worked for IBM you would already have this data, but at least you won't get fired if your analysis is off target.) 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." 2. You are now ready to estimate the Free Cash Flow for the new product. Compute the Free Cash Flow for each year using Eq. 8.5: Unlevered Net Income Free Cash Flow= (Revenues - Costs - Depreciation) x (1- 7) + Depreciation - CapEx - ANWC
Expert Answer:
Answer rating: 100% (QA)
Please find below the table with NPV and IRR calculation of the project Explainations are given belo... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
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 NPV of a proposed new type...
-
You have just been hired by EduRom Company, which was organized on January 2 of the current year. The company manufactures and sells a variety of educational DVDs for personal computers. It is your...
-
You have just been hired by the Stampeder Marketing Company to conduct a survey to estimate the mean amount of money spent by movie patrons (per movie) in Alberta. First use the range rule of thumb...
-
What is the probability that the number X of successes in the personnel managers sample of 100 employees in question 10 will be 48 or more?
-
Explain the key differences between survey research methodology and case study research methodology.
-
What is prototyping? Under what circumstances should prototyping be used? Under what circumstances should it not be used?
-
Beng-Yu Woo, Xiaoming Li, and Vivian Hsiun created and patented an invention titled Full Duplex Single Chip Video Codec. At the time, Woo, Li, and Hsiun were employees of Infochips Systems, Inc....
-
Rutherford Corporation has 20,000 shares of its $100 par value, 7 percent cumulative preferred stock outstanding and 100,000 shares of its $1 par value common stock outstanding. In Rutherfords first...
-
Briefly describe the two Oracle Administrative Tools and talk about some of their administration usage: -SQL*Plus - Oracle Enterprise Manager Database Express (EM Express) Question2: Explain briefly...
-
Suppose we form a portfolio invested in Mercedes and BMW stocks. The two stocks are equally weighted in the portfolio. The table below displays each stocks mean return, variance, and standard...
-
What are the most common areas where there is financial waste within a landscape project?
-
What is Registered Retirement Savings Plan (RRSP)? explain in detail
-
Kristin lives in Toronto and owns two automobiles which she insures separately. Automobile one is insured under policy A and has a liability limit of $400,000. Automobile two is insured under policy...
-
You are asked to evaluate the firm's productivity by comparing 2 year's performance. The following data is available: output (units) labor (hour) capital $ machinery $ cost of labor $ 2005 21,000...
-
5-48 A 25.400 mm, constant diameter shaft, is loaded with forces at A and B as shown, with ground reaction forces at O and C. The shaft also transmits a torque of 169.500 Nm throughout the length of...
-
A company provided the following benefits to one of its managers. Assume the exchange rate is $1=P50 and the foreign trip was for four days. How much is the fringe benefit tax for the quarter?...
-
A software system is to be developed to manage the records of [10] visitors who enter the University premises. The records include records of all regular monitoring (in and out time entries of...
-
Big Jim Company sponsored a picnic for employees and purchased a propane grill equipped with a standard-sized propane tank for the picnic. To make sure there was enough propane for all the cooking...
-
Differentiate between the fundamental analysis and technical analysis approaches used for stock valuation and selection.
-
Why is it important for business students to study finance even if the topic is not their major?
-
The Meyer Company must arrange financing for its working capital requirements for the coming year. Meyer can (a) Borrow from its bank on a simple interest basis (interest payable at the end of the...
-
How many structural isomers are there for hydrocarbons that have the molecular formula C 4 H 10 ? (a) none (b) one (c) two (d) three
-
Which contains more hydrogen atomsa five-carbon saturated hydrocarbon molecule or a five-carbon unsaturated hydrocarbon molecule? (a) The unsaturated hydrocarbon has more hydrogen atoms. (b) The...
-
Explain why caprylic acid, CH 3 (CH 2 ) 6 COOH, dissolves in a 5, aqueous solution of sodium hydroxide but caprylaldehyde, CH 3 (CH 2 ) 6 CHO, does not dissolve. (a) With two oxygens, the caprylic...
Study smarter with the SolutionInn App