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{"ops":[{"insert":"You have just been hired by Intel in its finance division. Your first assignment is to determine the net cash flows and NPV of a proposed new generation of mobile chips.\n\nCapital expenditures to produce the new chips will initially require an investment of\u00a0\n$1.2 billion. The R&D that will be required to finish the chips is $500 million this year.\u00a0\nAny ongoing R&D for upgrades will be covered in the margin calculation in 2a below.\u00a0The product family is expected to have a life of five years. First-year revenues for the new\u00a0chip are expected to be $2,000,000,000 ($2,000 million). The chip family\u2019s revenues are\u00a0expected to grow by 20% for the second year, and then decrease by 10% for the third,\u00a0decrease by 20% for the 4th and finally decrease by 50% for the 5th (final) year of sales.\u00a0Your job is to determine the rest of the cash flows associated with this project. Your boss\u00a0has indicated that the operating costs and net working capital requirements are similar\u00a0to the rest of the company\u2019s products. Since your boss hasn\u2019t been much help, here are\u00a0some tips to guide your analysis:\n1. Obtain Intel\u2019s financial statements. Download the annual income statements and balance sheets for the last four fiscal years from Wall Street Journal Website\n(https:\/\/www.wsj.com\/market-data\/quotes\/INTC\/financials\/annual\/income-statement). Go to \u201cFinancials.\u201d Click \u201cAnnual,\u201d to ensure you\u2019re getting\nannual, instead of quarterly, data. Next, copy and paste the income statements\nand balance sheets into Excel.\n2. You are now ready to determine the free cash flow. Compute the free cash flow for\neach year using Eq. 9.6 from this chapter showing all steps :\nFree Cash Flow = (Revenues - Costs - Depreciation) * (1 - Tax Rate)\n+ Depreciation - CapEx - Change in NWC ---------------- Unlevered Net Income \nSet up the timeline and computation of the free cash flow in separate, contiguous\u00a0\ncolumns for each year of the project life. Be sure to make outflows negative and\u00a0\ninflows positive.\na. Assume that the project\u2019s profitability will be similar to Intel\u2019s existing projects\nin 2015 and estimate costs each year by using the 2015 ratio of non-depreciation\ncosts to revenue:\n[(Cost of Revenue + SG&A + R&D)\/ Total Revenue]\nYou should assume that this ratio will hold for this project as well. You do not need\nto break out the individual components of operating costs in your forecast. Simply\nforecast the total of Cost of Revenue + SG&A + R&D for each year.\nb. Determine the annual depreciation by assuming Intel depreciates these assets by\nthe straight-line method over a 5-year life.\nc. Determine Intel\u2019s tax rate as [1 - (Income After Tax\/Income Before Tax)] in 2015.\nNote that on Intel\u2019s income statement on Google Finance, there is a difference\nbetween operating income and income before tax. That difference is due to small\nadjustments. Ignore this issue and simply focus on the Income Before Tax line.\nd. Calculate the net working capital required each year by assuming that the level\nof NWC will be a constant percentage of the project\u2019s sales. Use Intel\u2019s 2015\nNWC\/Sales to estimate the required percentage. (Use only accounts receivable,\naccounts payable, and inventory to measure working capital. Other components of\ncurrent assets and liabilities are harder to interpret and are not necessarily reflec-\ntive of the project\u2019s required NWC\u2014e.g., Intel\u2019s cash holdings.)\ne. To determine the free cash flow, calculate the additional capital investment and\nthe change in net working capital each year.\n3. Determine the IRR of the project and the NPV of the project at a cost of capi-\ntal of 12% using the Excel functions. For the calculation of NPV, include\ncash flows 1 through 5 in the NPV function and then subtract the initial cost\n(i.e., = NPV(rate, CF1 : CF5) + CF0). For IRR, include cash flows 0 through 5 in\nthe cash flow range\n"}]}

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