You work for Apple. After toiling away on $9.8 million worth of prototypes, you

Question

You work for Apple. After toiling away on $9.8 million worth of prototypes, you have finally produced your answer to Google Glasses: iGlasses (the name alone is genius). iGlasses will instantly transport e 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 four years until the next big thing comes along (or until users are unable to interact with actual human beings). Revenues are projected to be $445.7 milion per year along with expenses of $358.4 milion. You will need to spend $58.2 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 $9.6 million. As the iGlasses are an outcome of the R&D; center, Apple plans to charge $5 milion of the annual costs of the g capital levels will increase from their current level of $117.3 milion to $142 milion immediately. They will remain at the elevated level until year 4, when they will return to $117.3 milion. Apple's discount rate for this project is 14.3% and its tax rate is 35%. Calculate the ree cash flows and determine the NPV of this project (*) The opportunity cost must be atter tax. e center to the iGlasses product for four years. Finally, Apple's workin Calculate the free cash flows below: (Round to two decimal places.) (S million) YearO Year 0

Explanation / Answer

0 1 2 3 4 Revenue 445.7 445.7 445.7 445.7 Expenses -358.40 -358.40 -358.40 -358.40 Gross Cash Flows 87.30 87.30 87.30 87.30 Equipment -58.20 Existing Equipment -9.60 Depreciation -11.64 -18.62 -11.17 -6.70 R&D cost allocation -5.00 -5.00 -5.00 -5.00 Additional working Capital -24.7 -24.7 -24.7 -24.7 Cash Flows -67.80 45.96 38.98 46.43 50.90 Tax @ 35% 16.086 13.6416 16.24896 17.81338 29.87 25.33 30.18 33.08 Add: Depreciation 11.64 18.62 11.17 6.70 Incremental cash flows -67.80 41.51 43.95 41.35 39.78 PVF@14.3% 1 0.874 0.765 0.67 0.586 PV of Cash Flows -67.8 36.28324 33.62512 27.70225 23.31224 NPV $53.12 million

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