Your iHome analysis was so successful that you were promoted to Finance Director, and are asked...

Your iHome analysis was so successful that you were promoted to Finance Director, and are asked to make a go/no-go decision on the iPhone 10 based solely on a financial perspective. Calculate the project’s NPV, payback period, and IRR, given the following assumptions:

Initial investment: $40M in year 0, with $1M salvage value at the end of year 4
Sales: Expected to be $60M in year 1, growing by 25% in year 2, then dropping by 50% in each of the following 2 years, after which the product will be retired.
COGS: Expected to run at 50% of sales in year 1, and declining by 5 percentage points of sales per year through the end of the project.
Working capital: Apple expects a large initial investment in working capital as it fills its pipeline with inventory in year 1, equivalent to $5M. From year 2 and beyond, working capital is expected to rise/fall by 1% of the change in sales.
Depreciation: initial investment will be depreciated on a 4 year straight line schedule.
Taxes: 35%
Is a terminal value needed? Why or why not?
Discount rate of 20%
Should Apple proceed with the investment? Why or why not?

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Expert Solution

jeff jeffy answered 1 year ago

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