You work for Apple. After toiling away on $10.7 million worth of prototypes, you have finally produced your answer to Google Glasses: iGlasses (the name alone is genius). iGlasses will instantly transport the wearer into the world as Apple wants him to experience it: iTunes with the wink of an eye and apps that can be activated just by looking at them. You think that these will sell for 5 years until the next big thing comes along (or until users are unable to interact with actual human beings). Revenues are projected to be $454.6 million per year along with expenses of $354.7 million. You will need to spend $62.2 million immediately on additional equipment that will be depreciated using the 5-year MACRS schedule. Additionally, you will use some fully depreciated existing equipment that has a market value of $9.8 million. As the iGlasses are an outcome of the R&D center, Apple plans to charge $5.3 million of the annual costs of the center to the iGlasses product for 5 years. Finally, Apple's working capital levels will increase from their current level of $115.3 million to $139.8 million immediately. They will remain at the elevated level until year 5, when they will return to $115.3 million. Apple's discount rate for this project is 15.1% and its tax rate is 30%. Calculate the free cash flows and determine the NPV of this project. (Note: Assume that the opportunity cost must be after-tax and the equipment is put into use in year 1.) Year 2 Year 3 Year 4 Year 5 Year 6 $ ($ million) Year 0 Year 1 Sales $ 0.00 $ $ - Cost of Goods Sold 0.00 Gross Profit $ 0.00 $ $ 0.00 0.00 0.00 - Annual Charge Depreciation EBIT - Tax at 30% Incremental Earnings + Depreciation - Changes in NWC A EA A SA EA SA 0.00 EA EA A 0.00 ᏌᏊ 0.00 SA EA 0.00 0.00 0.00 0.00 0.00 - Capital Expenditures 0.00 0.00 0.00 0.00 0.00 0.00 - Opportunity Cost 0.00 0.00 0.00 0.00 0.00 0.00 Incremental FCFs
You work for Apple. After toiling away on $10.7 million worth of prototypes, you have finally produced your answer to Google Glasses: iGlasses (the name alone is genius). iGlasses will instantly transport the wearer into the world as Apple wants him to experience it: iTunes with the wink of an eye and apps that can be activated just by looking at them. You think that these will sell for 5 years until the next big thing comes along (or until users are unable to interact with actual human beings). Revenues are projected to be $454.6 million per year along with expenses of $354.7 million. You will need to spend $62.2 million immediately on additional equipment that will be depreciated using the 5-year MACRS schedule. Additionally, you will use some fully depreciated existing equipment that has a market value of $9.8 million. As the iGlasses are an outcome of the R&D center, Apple plans to charge $5.3 million of the annual costs of the center to the iGlasses product for 5 years. Finally, Apple's working capital levels will increase from their current level of $115.3 million to $139.8 million immediately. They will remain at the elevated level until year 5, when they will return to $115.3 million. Apple's discount rate for this project is 15.1% and its tax rate is 30%. Calculate the free cash flows and determine the NPV of this project. (Note: Assume that the opportunity cost must be after-tax and the equipment is put into use in year 1.) Year 2 Year 3 Year 4 Year 5 Year 6 $ ($ million) Year 0 Year 1 Sales $ 0.00 $ $ - Cost of Goods Sold 0.00 Gross Profit $ 0.00 $ $ 0.00 0.00 0.00 - Annual Charge Depreciation EBIT - Tax at 30% Incremental Earnings + Depreciation - Changes in NWC A EA A SA EA SA 0.00 EA EA A 0.00 ᏌᏊ 0.00 SA EA 0.00 0.00 0.00 0.00 0.00 - Capital Expenditures 0.00 0.00 0.00 0.00 0.00 0.00 - Opportunity Cost 0.00 0.00 0.00 0.00 0.00 0.00 Incremental FCFs
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:You work for Apple. After toiling away on $10.7 million worth of prototypes, you have finally produced your answer to Google Glasses: iGlasses (the name alone is genius). iGlasses will instantly
transport the wearer into the world as Apple wants him to experience it: iTunes with the wink of an eye and apps that can be activated just by looking at them. You think that these will sell for 5
years until the next big thing comes along (or until users are unable to interact with actual human beings). Revenues are projected to be $454.6 million per year along with expenses of $354.7
million. You will need to spend $62.2 million immediately on additional equipment that will be depreciated using the 5-year MACRS schedule. Additionally, you will use some fully depreciated
existing equipment that has a market value of $9.8 million. As the iGlasses are an outcome of the R&D center, Apple plans to charge $5.3 million of the annual costs of the center to the iGlasses
product for 5 years. Finally, Apple's working capital levels will increase from their current level of $115.3 million to $139.8 million immediately. They will remain at the elevated level until year 5,
when they will return to $115.3 million. Apple's discount rate for this project is 15.1% and its tax rate is 30%. Calculate the free cash flows and determine the NPV of this project. (Note: Assume
that the opportunity cost must be after-tax and the equipment is put into use in year 1.)
Year 2
Year 3
Year 4
Year 5
Year 6
$
($ million)
Year 0
Year 1
Sales
$
0.00 $
$
- Cost of Goods Sold
0.00
Gross Profit
$
0.00 $
$
0.00
0.00
0.00
- Annual Charge
Depreciation
EBIT
- Tax at 30%
Incremental Earnings
+ Depreciation
- Changes in NWC
A
EA
A
SA
EA
SA
0.00
EA
EA
A
0.00
ᏌᏊ
0.00
SA
EA
0.00
0.00
0.00
0.00
0.00
- Capital Expenditures
0.00
0.00
0.00
0.00
0.00
0.00
- Opportunity Cost
0.00
0.00
0.00
0.00
0.00
0.00
Incremental FCFs
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