Question

Question 2 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 blink of an eye and apps that can be activated just by looking at them. You think that these will sell for five years until the next big thing comes along (i.e. Galaxy Glass). Revenues are projected to be $442.1 million per year along with expenses of $350.3 million. You will need to spend $64 million immediately on additional equipment that will be depreciated using the 5-year MACRS schedule. [Note: Equipment is put into use in year 1, so depreciation starts in year 1. From year 1 to year 6, depreciation is 12.8, 20.48, 12.29, 7.37, 7.37, 3.69.] Additionally, you will use some fully depreciated existing equipment that has a market value of $9.9 million. As the iGlasses are an outcome of the R&D center, Apple plans to charge $5 million of the annual costs of the center to the iGlass product for four years. Finally, Apple's working capital levels will increase from their current level of $121 million to $141.2 million immediately. They will remain at the elevated level until Year 4, and they will return to $121 million by Year 5. Apple's discount rate for this project is 14.5% and its tax rate is 35% What is the NPV of Apple's project? Provide details on how you get to each line of items. 2 Year 3 4 5 6 (in million USD) Incremental Revenue Incremental Cost Depreciation Incremental EBIT Tax (35%) Incremental Earnings Depreciation (added back) Capital Expenditure Opportunity Cost Changes in NWC Unlevered Free Cash Flow

Answer 1

Tax rate		35%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Total
Cost		$                   64.00	$                   64.00	$                64.00	$                     64.00	$                             64.00	$               64.00
Dep Rate		20.00%	32.00%	19.20%	11.52%	11.52%	5.76%
Depreciation		$                   12.80	$                   20.48	$                12.29	$                       7.37	$                                7.37	$                  3.69	$         64.00
Calculation of after-tax salvage value			New Equipment	Old Equipment
Cost of machine			$                   64.00
Depreciation			$                   64.00
WDV			$                          -	$                      -
Sale price			$                          -	$                  9.90
Profit/(Loss)			$                          -	$                  9.90
Tax			$                          -	$                  3.47
Sale price after-tax			$                          -	$                  6.44
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6
Sale		$                 442.10	$                 442.10	$             442.10	$                   442.10	$                           442.10	$             442.10
Less: Operating Cost		$                 350.30	$                 350.30	$             350.30	$                   350.30	$                           350.30	$             350.30
Contribution		$                   91.80	$                   91.80	$                91.80	$                     91.80	$                             91.80	$               91.80
Less: Fixed cost
Less: Depreciation		$                   12.80	$                   20.48	$                12.29	$                       7.37	$                                7.37	$                  3.69
Profit before tax		$                   79.00	$                   71.32	$                79.51	$                     84.43	$                             84.43	$               88.11
Tax@35%		$                   27.65	$                   24.96	$                27.83	$                     29.55	$                             29.55	$               30.84
Profit After Tax		$                   51.35	$                   46.36	$                51.68	$                     54.88	$                             54.88	$               57.27
Add Depreciation		$                   12.80	$                   20.48	$                12.29	$                       7.37	$                                7.37	$                  3.69
Cash Profit after-tax		$                   64.15	$                   66.84	$                63.97	$                     62.25	$                             62.25	$               60.96
Calculation of NPV
						14.50%
Year	Old Equipment	Capital	Working capital	Operating cash	Annual Cash flow	PV factor	Present values
0	$                (6.44)	$                  (64.00)	$                 (20.20)		$                    (90.64)	1.0000	$              (90.64)
1				$                64.15	$                     64.15	0.8734	$               56.03
2				$                66.84	$                     66.84	0.7628	$               50.98
3				$                63.97	$                     63.97	0.6662	$               42.62
4				$                62.25	$                     62.25	0.5818	$               36.22
5			$                   20.20	$                62.25	$                     82.45	0.5081	$               41.90
6	$                      -	$                          -	$                          -	$                60.96	$                     60.96	0.4438	$               27.05
					Net Present Value		$             164.15