At the end of 2013, the executives at Appleevaluated a number of competitive threats to their very profitable iPhone business and decided that the iPhone 6 would need to exhibit some fundamental improvements.

For example, they considered an increase in screen size, possibly to 5.5 inches, and a Bluetooth connection to an accompanying watch, which would display incoming emails and texts along with the number of incoming calls. Apple estimates that the more aggressive product launch will require a development budget of $ 1.5 billion versus $ 800 million for a more modest effort. Discuss how you would estimate the incremental cash flows associated with this decision. To answer this question, consider both the Frito Lay and Lecion examples in the chapter.

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4,000,000 400,000 Fixed operating cost of the change in revenues for the year Required rate of return 15% Variable operating costs Fixed operating costs Depreciation expense Net operating income (900,000 (1,350,000) (3,375,000) 3,937500) 250,000) (1,000,000 (1,000.000) (1.000,000) (1,000,000) .000,000) Plus: Depreciation 4,000,000) Less: Working capital (200,000 (100,000) (450,00) (125.000) (4200,000) 419,435 18.01 % t present value Internal rate of return