Question

In: Finance

Case - Apple is planning to launch a new easy-to-use kitchen appliance with a touchscreen interface,...

Case - Apple is planning to launch a new easy-to-use kitchen appliance with a touchscreen interface, the iToaster. Apple expects to sell 1 million and 2 million units in the first two years after launch, respectively, and then to discontinue this product. Each unit will sell for $200 in the first year after launch, and $150 in the second year. The costs of components and labor are $40 per unit, while salaries and other expenses add up to $10 million in each year the product is sold. The factory that manufactures the iToaster requires an investment of $60 million right now and $30 million one year from now. It will take one year to complete, so production will only start in the second year, i.e. at the end of year 2 followed by one more year of production in at the end of year 3. The factory will be depreciated linearly to zero over 5 years after its completion.

To get production up and running, Apple has to buy components worth $5 million immediately before the launch of the product, and add another $2 million worth of components to its inventory exactly one year later. The firm's marginal tax rate is 34%.

a. What is the annual depreciation (in $ million)?

b. What is the net operating profit after taxes in year 2 (in $ million)?

c. What is the net operating profit after taxes in year 3 (in $ million)?

d. What is the free cash flow (FCF) at the end of year 0 (in $ million)?

e. What is the free cash flow (FCF) at the end of year 1 (in $ million)?

f. What is the free cash flow (FCF) at the end of year 2 (in $ million)?

Solutions

Expert Solution

a) Annual depreciation = $18 million
(60,000,000 + 30,000,000) / 5 = 18,000,000

b) Net operating profit after taxes in year 2 = $105.12 million

c) Net operating profit after taxes in year 3 = $144.72 million

d) free cash flow (FCF) at the end of year 0 = -$60 million

e) free cash flow (FCF) at the end of year 1 = -$30,000,000

f) free cash flow (FCF) at the end of year 2 = $100.12 million


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