Question

Company Chosen is APPLE

Apple WACC:6.98% -Please use this rate.

Apple Inc. currently has property and equipment as $37,378,000.00

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.)

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

Should Purchase?

If possible please provide a break down of calculations as well as excel sheet.

Answer 1

Calculation of NPV

A. Initial Investment (Year 0)
Cost of Machine	3,737,800
Increase in Working Capital	0
Total Outlow (A)	3,737,800

B. Annual Cash Flow After Tax

Calculation of Depreciation
Depreciation = (Cost of Machine - Salvage Value) / N
Depreciation =	295,909

Particulars	Cash Flow
EBIT	672,804
Less : Depreciation	295,909
Earning Before Tax	376,895
Less : Tax	131,913
Earning After Tax	244,982
Add Back : Depreciation	295,909
Cash flow After Tax	540,891

PV of this Cash Flow
CFAT	540,890.81
PVAF 6.98%, 12	7.95
PV of CFAT (B)	4,300,708.95

C. Terminal Value

Salvage Value	186,890.00
PVAF 6.98%, 12	0.45
Present Value of Terminal Cash Flow {C}	83,167.75

Calculation of NPV

Initial Outflow (A)	-3,737,800.00
PV of Annual Cash Flow (B)	4,300,708.95
PV of Terminal Cash Flow "C"	83,167.75
Net Present Value	646,076.70

NPV = 646076.70

Calculation of IRR

Year	Initial Outflow	Annual Cash Flow	Terminal Value	Total Yearly Cash Flow
0	-3,737,800.00			-3,737,800.00
1		540,890.81		540,890.81
2		540,890.81		540,890.81
3		540,890.81		540,890.81
4		540,890.81		540,890.81
5		540,890.81		540,890.81
6		540,890.81		540,890.81
7		540,890.81		540,890.81
8		540,890.81		540,890.81
9		540,890.81		540,890.81
10		540,890.81		540,890.81
11		540,890.81		540,890.81
12		540,890.81	186,890.00	727,780.81

To calculate IRR we use formulae =IRR and select "Total Yearly cash flow" from year 0 to 12

IRR = 10.04%

Discounted Payback

Year	Total Yearly Cash Flow	Present Value	Cumulative
1	540,890.81	505,599.93	505,599.93
2	540,890.81	472,611.64	978,211.57
3	540,890.81	441,775.70	1,419,987.27
4	540,890.81	412,951.67	1,832,938.94
5	540,890.81	386,008.29	2,218,947.23
6	540,890.81	360,822.86	2,579,770.09
7	540,890.81	337,280.67	2,917,050.75
8	540,890.81	315,274.51	3,232,325.26
9	540,890.81	294,704.16	3,527,029.41
10	540,890.81	275,475.93	3,802,505.35

Discounted Payback = 9 + (3737800-3527029.41) / 275475.93

Discounted Payback = 9 + 0.76 = 9.76 Years

DECISION

Since NPV is positive

IRR is greater than cost of capital

and Discounted Payback period is less than life of the machine

WE should purchase the machine