Perform a sensitivity analysis by varying the project

Reference no: EM132467055

You have just been hired by Internal Business Machines Corporation (IBM) 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 IBM's Property, Plant, and Equipment (PPE) at the end of fiscal year 2014. The project will then 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 new product are expected to be 3% of IBM's total revenue for the fiscal year 2014. 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 straight-line for capital budgeting purposes. Since your boss hasn't been much help (welcome to the "real world"!), here are some tips to guide your analysis:

Obtain IBM's financial statements. Get IBM data by Download the annual income statements, balance sheets, and cash flow statements for the last four fiscal years from Yahoo! Finance (finance.yahoo.com). Enter IBM's ticker symbol and then go to "financials."

1. 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.

2. Perform a sensitivity analysis by varying the project forecasts as follows:

a. Suppose first year sales will equal 2%-4% of IBM'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%.

Note: Updates to this data case may be found at www.berkdemarzo.com.

Reference no: EM132467055

Questions Cloud

Effect of balance of payment on the exchange rate : You need to justify your prediction clearly using academic theories (i.e. international parities; the effect of balance of payment on the exchange rate, etc.)

What is assessment of public company : What is your assessment of Public's company, its performance, its strengths, target audience, and it positioning?

Calculate the adjusted cash balance per books on september : Gunnar Company gathered in preparing its September bank reconciliation. Calculate the adjusted cash balance per books on September 30.

Investor reaction to that berkshire hathaway : What is your interpretation of the investor reaction to the announcement that Berkshire Hathaway (BRK) would purchase Precision Castparts Corporation

Perform a sensitivity analysis by varying the project : 2. Perform a sensitivity analysis by varying the project forecasts as follows: Suppose first year sales will equal 2%-4% of IBM's revenues.

Develop the concept of comprehensive income : What was the intent of the FASB to develop the concept of comprehensive income?Which method do you prefer and why? Give specific reasons or examples.

Investigate data giving full description for business domain : Investigate your data giving a full description for the business domain that you extracted the data from. Develop three different business scenarios

Determine what is the ending balance of retained earnings : Determine What is the ending balance of retained earnings? What is the total amount in liabilities and stockholders equity together?

Calculate haslam profit margin and liabilities?to?assets : Calculate Haslam's profit margin and liabilities?to?assets ratio. Suppose half its liabilities are in the form of debt. What is Haslma's debt?to?assets ratio?

User Account

All Pages