Question

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:

1. Initial investment: $40M in year 0, with $1M salvage value at the end of year 4
2. 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.
3. 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.
4. 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.
5. Depreciation: initial investment will be depreciated on a 4 year straight line schedule.
6. Taxes: 35%
7. Is a terminal value needed? Why or why not?
8. Discount rate of 20%
9. Should Apple proceed with the investment? Why or why not?

Answer 1