You work for Apple. After toiling away on $10.2 million worth of prototypes, you

Question

You work for Apple. After toiling away on $10.2 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 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 $442.1 million per year along with expenses of $348.2 million. You will need to spend $58.6 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 $10.1 million. As the iGlasses are an outcome of the R&D center, Apple plans to charge $5.2 million of the annual costs of the center to the iGlasses product for four years. Finally, Apple's working capital levels will increase from their current level of $120.5 million to $142.9 million immediately. They will remain at the elevated level until year 4, when they will return to $120.5 million. Apple's discount rate for this project is 14.9% and its tax rate is 35%. Calculate the free cash flows and determine the NPV of this project. (*) The opportunity cost must be after-tax.

Explanation / Answer

Npv is positive.

For working

Year Revenue-expenses Cost incurred Additional Spending Depriciation Total value Tax-rate @ 35% Total Discount rate Discounted value 0 10.2 68.80 0 0 0.000 1 0 1 88.7 13.760 74.940 26.229 48.711 62.471 0.870322019 54.36989 2 88.7 22.016 66.684 23.3394 43.345 65.361 0.757460417 49.50807 3 88.7 13.210 75.490 26.42164 49.069 62.278 0.65923448 41.05604 4 88.7 7.926 80.774 28.270984 52.503 60.429 0.573746283 34.67092 5 88.7 7.926 80.774 28.270984 52.503 60.429 0.499344024 30.17487 209.7798

Npv is positive.

For working

Free Cash flow Year Revenue-expenses Cost incurred Additional Spending Depriciation Total Value Release of working capital Total Discount rate Discounted value 0 10.2 68.80 0 91.20 -91.200 1 -91.2 1 88.7 10.2 13.760 64.740 54.37 54.370 0.870322 47.31931 2 88.7 10.2 22.016 56.484 49.51 49.508 0.75746 37.5004 3 88.7 10.2 13.210 65.290 41.06 41.056 0.659234 27.06556 4 88.7 10.2 7.926 70.574 34.67 34.671 0.573746 19.89231 5 88.7 10.2 7.926 70.574 41.36 41.360 0.499344 20.65296 129.765 152.4305 NPV Year Revenue-expenses Cost incurred Additional Spending Depriciation Total value Tax-rate @ 35% Total Discount rate Discounted value 0 10.2 68.80 0 0 0.000 1 0 1 88.7 13.760 74.940 26.229 48.711 62.471 0.870322019 54.36989 2 88.7 22.016 66.684 23.3394 43.345 65.361 0.757460417 49.50807 3 88.7 13.210 75.490 26.42164 49.069 62.278 0.65923448 41.05604 4 88.7 7.926 80.774 28.270984 52.503 60.429 0.573746283 34.67092 5 88.7 7.926 80.774 28.270984 52.503 60.429 0.499344024 30.17487 209.7798 0 10.2 0 58.6 0 22.4 91.2 1 -91.2 1 62.471 0.870322 54.37 2 65.361 0.75746 49.51 3 62.278 0.659234 41.06 4 60.429 0.573746 34.67 5 60.429 0.499344 30.17 5 22.400 0.499344 11.19 129.77

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