Question

Company Chosen is APPLE

Apple WACC:7.03%

The firm is looking to expand its operations by 10% of the firm's net property, plant, and equipment. (Calculate this amount by taking 10% of the property, plant, and equipment figure that appears on the firm's balance sheet.) Apple Inc. currently has property and equipment as $37,378,000.00

The estimated life of this new property, plant, and equipment will be 12 years. The salvage value of the equipment will be 5% of the property, plant and equipment's cost.

The annual EBIT for this new project will be 18% of the project's cost. The company will use the straight-line method to depreciate this equipment. Also assume that there will be no increases in net working capital each year. Use 35% as the tax rate in this project.

The following capital budgeting results for the project

• Net present value
• Internal rate of return
• Discounted payback period.

Answer 1

Operating cash flow (FCF) each year = income after tax + depreciation

profit on sale of PPE at end of year 12 = sale price - book value

The book value is zero as the PPE is fully depreciated.

after-tax salvage value = salvage value - tax on profit sale of PPE   

Present value of each cash flow = cash flow / (1 + WACC)n

where n = number of years after which the cash flow occurs.

NPV = sum of present values of project cash flows.

NPV = $2,253,990

IRR is calculated using IRR function in Excel

IRR is 9.41%

Discounted payback period is the time taken for the cumulative discounted cash flows to equal zero

Discounted payback period = 6 + (discounted cash flow required in year 7 for cumulative discounted cash flows to equal zero / year 7 discounted cash flow)

Discounted payback period = 6 + ($171,890 / $465,405) = 6.37 years