Western Digital is considering the launch of 32TB version of its My Passport external drives. The...

 

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Western Digital is considering the launch of 32TB version of its My Passport external drives. The company spent $50 million to develop the product and paid $2 million to a marketing research company to explore the product's marketability. It is estimated that this investment is going to last for 4 years. The sales revenue from the investment is expected to be $800 million, $900 million, $600 million and $400 million in years 1 through 4, respectively. The variable costs are expected to be 40% of sales and fixed costs are expected to be $90 million a year. The investment requires an initial net working capital of $150 million, which then will be 25% of sales and fully recovered at the end of the project. The launch of this new version is expected to reduce the after-tax cash flow of the previous versions by $50 million a year over the life of the project. The company is going to use an already existing storage unit for the product. The unit was bought for $1 million 20 years ago and is fully depreciated. It is currently valued at $20 million and is expected to have a market value of $10 million at the end of the investment. The company will have to buy new equipment to manufacture the product costing $420 million, which will be depreciated straight-line to zero over 7 years. The market value of this equipment is expected to be $210 million at the end of the investment. Western Digital requires 15% annual return on its investments and it is in 20% marginal tax bracket. a. Using the net present value analysis, determine whether the company should accept this investment. b. By how much does the net present value change if the expectation on variable costs is updated to 45% of the sales instead of the original 40% of the sales? c. By how much does the net present value change if the expectation on the cost of equipment is updated to $350 million instead of the original $420 million? d. By how much does the net present value change if the government allows all operations-related taxes to be deferred till one year after the end of the project? Western Digital is considering the launch of 32TB version of its My Passport external drives. The company spent $50 million to develop the product and paid $2 million to a marketing research company to explore the product's marketability. It is estimated that this investment is going to last for 4 years. The sales revenue from the investment is expected to be $800 million, $900 million, $600 million and $400 million in years 1 through 4, respectively. The variable costs are expected to be 40% of sales and fixed costs are expected to be $90 million a year. The investment requires an initial net working capital of $150 million, which then will be 25% of sales and fully recovered at the end of the project. The launch of this new version is expected to reduce the after-tax cash flow of the previous versions by $50 million a year over the life of the project. The company is going to use an already existing storage unit for the product. The unit was bought for $1 million 20 years ago and is fully depreciated. It is currently valued at $20 million and is expected to have a market value of $10 million at the end of the investment. The company will have to buy new equipment to manufacture the product costing $420 million, which will be depreciated straight-line to zero over 7 years. The market value of this equipment is expected to be $210 million at the end of the investment. Western Digital requires 15% annual return on its investments and it is in 20% marginal tax bracket. a. Using the net present value analysis, determine whether the company should accept this investment. b. By how much does the net present value change if the expectation on variable costs is updated to 45% of the sales instead of the original 40% of the sales? c. By how much does the net present value change if the expectation on the cost of equipment is updated to $350 million instead of the original $420 million? d. By how much does the net present value change if the government allows all operations-related taxes to be deferred till one year after the end of the project?