iCovers, Incorporated wants to make covers for all the products that Apple manuf
ID: 2738096 • Letter: I
Question
iCovers, Incorporated wants to make covers for all the products that Apple manufactures. The company is looking at new covers for the iPhone, iPad, iPalm, iThumb, and iEye. The initial investment in capital equipment will be $10,000,000. The projected revenues and costs are:
1
2
3
4
5
6
Revenue
$10,000,000
$13,000,000
$17,000,000
$23,000,000
$18,000,000
$12,000,000
Variable
$ 4,000,000
$ 5,200,000
$ 6,800,000
$ 9,200,000
$ 7,200,000
$ 4,800,000
Fixed
$ 1,500,000
$ 1,500,000
$ 1,500,000
$ 1,500,000
$ 1,500,000
$ 1,500,000
S, G & A
$ 1,250,000
$ 1,400,000
$ 1,750,000
$ 2,000,000
$ 2,000,000
$ 1,500,000
The initial investment in working capital is $2,000,000. However, working capital will increase or decrease each year so that it is always 20% of the anticipated revenue for the coming year. The equipment will be depreciated using a MACRS five-year life, and there is no salvage value for the equipment at the end of the six-year project. The tax rate for iCovers is 37%.
Using a spreadsheet, set up the project’s incremental cash flows showing the initial outlay (both capital and working capital), the operating cash flow each year, and the change in working capital each year. Note that the company will terminate the project in year six. Then calculate the project’s IRR and NPV if the project’s discount rate is 14%.
1
2
3
4
5
6
Revenue
$10,000,000
$13,000,000
$17,000,000
$23,000,000
$18,000,000
$12,000,000
Variable
$ 4,000,000
$ 5,200,000
$ 6,800,000
$ 9,200,000
$ 7,200,000
$ 4,800,000
Fixed
$ 1,500,000
$ 1,500,000
$ 1,500,000
$ 1,500,000
$ 1,500,000
$ 1,500,000
S, G & A
$ 1,250,000
$ 1,400,000
$ 1,750,000
$ 2,000,000
$ 2,000,000
$ 1,500,000
Explanation / Answer
Depreciation Schedule Year Basis % Depreciation Accumulated Ending M Expense Depreciation Book Value 1 $10,000,000 38.33% $3,833,333 $3,833,333 $6,166,667 DB 2 $10,000,000 24.67% $2,466,667 $6,300,000 $3,700,000 DB 3 $10,000,000 14.80% $1,480,000 $7,780,000 $2,220,000 DB 4 $10,000,000 8.88% $888,000 $8,668,000 $1,332,000 DB 5 $10,000,000 6.80% $680,170 $9,348,170 $651,830 SL 6 $10,000,000 6.52% $651,830 $10,000,000 $0 SL 0 1 2 3 4 5 6 Revenue 10000000 13000000 17000000 23000000 18000000 12000000 Working Capital 2000000 2600000 3400000 4600000 3600000 2400000 0 Change in WC 600000 800000 1200000 -1000000 -1200000 -2400000 Statement of operating casf flow 1 2 3 4 5 6 Revenue 10000000 13000000 17000000 23000000 18000000 12000000 Variable 4000000 5200000 6800000 9200000 7200000 4800000 Fixed 1500000 1500000 1500000 1500000 1500000 1500000 S, G & A 1250000 1400000 1750000 2000000 2000000 1500000 Depreciation $3,833,333 $2,466,667 $1,480,000 $888,000 $680,170 $651,830 Profit ($583,333) $2,433,333 $5,470,000 $9,412,000 $6,619,830 $3,548,170 Tax @ 37% -215833.21 900333.21 2023900 3482440 2449337.1 1312822.9 PAT ($367,500) $1,533,000 $3,446,100 $5,929,560 $4,170,493 $2,235,347 Operating Cash Flow $3,465,833 $3,999,667 $4,926,100 $6,817,560 $4,850,663 $2,887,177 Statement of casf flow 0 1 2 3 4 5 6 Operating Cash Flow $3,465,833 $3,999,667 $4,926,100 $6,817,560 $4,850,663 $2,887,177 Initial Outlay -12000000 Change in Cash flow due to WC 600000 800000 1200000 -1000000 -1200000 -2400000 Total Cash flow -12000000 4065833 4799667 6126100 5817560 3650663 487177 Projects IRR & NPV Year Total Cash flow DF @ 14% PV 0 -12000000 1 -12000000 1 4065833 0.877 3566520 2 4799667 0.769 3693188 3 6126100 0.675 4134943 4 5817560 0.592 3444463 5 3650663 0.519 1896040 6 487177 0.456 221951 IRR 29.5% NPV $ 4,957,105 IRR 29.5% NPV $4,957,105
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