Apple is planning to launch a new easy-to-use kitchen appliance with a touchscreen interface, the iToaster. Apple
Question:
Apple is planning to launch a new easy-to-use kitchen appliance with a touchscreen interface, the iToaster. Apple expects to sell 1 million and 2 million units
in the first two years after launch, respectively, and then to discontinue this product. Each unit will sell for $200 in the first year after launch, and $150 in the
second year. The costs of components and labor are $40 per unit, while salaries and other expenses add up to $10 million in each year the product is sold.
The factory that manufactures the iToaster requires an investment of $60 million right now and $30 million one year from now. It will take one year to
complete, so production will only start in the second year, i.e. at the end of year 2 followed by one more year of production in at the end of year 3. The factory
will be depreciated linearly to zero over 5 years after its completion.
To get production up and running, Apple has to buy components worth $5 million immediately before the launch of the product, and add another $2 million
worth of components to its inventory exactly one year later.
The firm's marginal tax rate is 34%.
a. What is the annual depreciation (in $ million)?
b. What is the net operating profit after taxes in year 2 (in $ million)?
c. What is the net operating profit after taxes in year 3 (in $ million)?
d. What is the free cash flow (FCF) at the end of year 0 (in $ million)?
e. What is the free cash flow (FCF) at the end of year 1 (in $ million)?
f. What is the free cash flow (FCF) at the end of year 2 (in $ million)?