You have just been hired by Dell Computers in their capital budgeting division. Your first assignment is to determine the free cash flows and NPV of a proposed new type of tablet computer similar in size to an iPad but with the operating power of a high-end desktop system.
Development of the new system will initially require an initial capital expenditure equal to 10% of Dell’s Property, Plant, and Equipment (PPE) at the end of fiscal year 2012. The project will require an additional investment equal to 10% of the initial investment after the first year of the project, a 5% increase after the second year, and a 1% increase after the third, fourth, and fifth years. The product is expected to have a life of five years. First-year revenues for the product are expected to be 3% of Dell’s total revenue for the fiscal year 2012. The new product’s revenues are expected to grow at 15% for the second year then 10% for the third and 5% annually for the final two years of the expected life of the project. Your job is to determine the rest of the cash flows associated with this project. Your boss has indicated that the operating costs and net working capital requirements are similar to the rest of the company and that depreciation is staight-line for capital budgeting purposes. Since your boss has’nt been much help (welcome to the “real world”!), here are some tips to guide your analysis:
1. Obtain Dell’s financial statements. (If you really worked for Dell you would already have this data, but at least you won’t get fired if your analysis is off target.) Down load the annual income statements, balance sheets, and cash flow statements for the last fiscal years from Yahoo! Finance (finance.yahoo.com). Enter Dell’s ticker symbol and then go to “financials.”
2. You are now ready to estimate the Free Cash Flow for the new product. Compute the Free Cash Flow for each year using Eq. 8.5:
Free Cash Flow=(Revenues-Costs-Depreciation) x(1-T) + Depreciation-Capital Expenditure-Change in Net Working Capital
Set up the timeline and computation of free cash flow in separate, contigous columns for each year of the project life. Be sure to make outflows negative and inflows positive.
a. Assume that the project’s profitability will be similar to Dell’s existing projects in 2012 and estimate (revenues-costs) each year by using the 2012 EBITDA/Sales profit margin. Calculate EBITDA as EBIT + Depreciation expense from the cash flow statement.
b. Determine the annual depreciation by assuming Dell depreciates thes assets by straight-line method over a 5-year life.
c. Determine Dell’s tax rate by using the income tax rate in 2012.
d. Calculate the net working capital required rach year by assuming that the level of Net working capital will be a constant percentage of the project’s sales. Use Dell’s 2012 net working capital/sales to estimate the required percentage. (Use only accounts receivable, accounts payable, and inventory to measure working capital. other components of current assets and liabilities are harder to interpret and not necessarily reflective of the project’s required net woking capital- for example, Dell’s cash holdings.)
e. To determine the free cash flow, deduct the additional investment and the change in net working capital each year.
3. Use Excel to determine the NPV of the project with a 12% cost of capital. Also calculate the IRR of the project using Excel’s IRR function.
4.Perform a sensitivity analysis by varying the project forecasts as follows:
a. Suppose first year sales will equal 2%-4% of Dell’s revenues.
b. Suppose the cost of capital is 10%-15%.
c. Suppose revenue growth is constant after the first year at a rate of 0%-10%.
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more