Take Home FinalGSBA509(1)

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Arizona State University *

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Finance

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Jan 9, 2024

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docx

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Take Home Final Please submit your final answers on Blackboard under “Final Exam” located under the Assignments section. Please upload your work on Blackboard in an excel file. All work is to be done independently. 1. Apple will be introducing the ifridge, and will be in production for the next three years. Apple has spent $450,000 in consumer demand studies and $100,000 in research in development. Apple projects that it will be able to sell 80,000 units in the first year, and Apple assumes the number of units sold will increase by 30% each year. Each ifridge will sell for $2,200. Consumers will have the option to purchase the Apple Set-Up Plan which cost $300 at time of purchase. The Apple Set up plan covers delivery and installation. It is projected that 30% of transactions will elect to purchase the $300 Apple Set-Up plan. The ifridge will have variable cost of $1675 per unit, and an annual fixed cost of 42 million a year (which includes any costs associated with the Apple Set-Up Plan). In order to start making the ifridges at a competitive rate, Apple will need to buy a new machine that will cost 30.89 million. Apple will use the 5-year MACRS schedule to depreciate the machine. Apple expects that it will be able to sell the machine for $7 million at the end of the third year. In order to promote the product, Apple will need to set aside $10 mil worth in new working capital at the before launching the project, and will readjust NWC levels to reflect 10% of ifridge sales (not including the Apple Set up plan), which will occur with the timing of the cash flows for that year. For example, NWC for year 1 will be 10% of the sales from the 80,000 units sold in year one. In the last year, all net working capital will be liquidated and recouped. The required return for the project is 15%, and the tax rate is 21%.  Sales: 80,000 units, with annual growth of 30% in the number of units  Retail price $2,200, variable cost: $1675 per unit, 42 million in yearly fixed costs.  Optional $300 set up plan, 30% of units sold will purchase the set up plan  Machine cost 30,890,000, depreciated using 5 yr MACRS. Salvage value 7 million.  NWC 10,000,000 in year 0, and then adjust levels equal to 10% of iFridge sales for each year. All NWC will be liquidated and recouped in the final year. 1. 1A. What is the NPV of this project? Round to the nearest penny. 1B. What is the IRR of this project? 1c. Perform a break-even sensitivity analysis for the following inputs: sales growth rate, retail price, variable cost, and the percentage of sales that elect to buy the Apple Set up Plan). What are the critical values for these variables that set NPV equal to zero?

1D. From the analysis performed in 1c, which variable is the riskiest from a capital budgeting perspective? 2. WACC: Microsoft (MSFT) using data from Yahoo Finance. a. Using 10 years (from 12/15/2013 to 12/15/2023) of monthly returns, calculate the beta of Microsoft using VTI (ticker symbol) as the market returns. What is the Beta? b. What is your estimate for the cost of equity using the CAPM approach? Assume a market return of 9%, and a risk free rate of 3.91%. c. Pull historical dividend data for MSFT and estimate the cost of equity using the DGM. Explain the steps you take and assumptions you make. What is your final value for cost of equity using DGM. d. What rate do you use as the cost of debt for MSFT. Explain your answer. e. Calculate the final WACC for MSFT. For cost of equity, use the average value from the CAPM approach and the DGM approach. Explain your answer and any assumptions that you make. Assume a corporate tax rate of 21% 3. We are in the business of manufacturing stamped metal subassemblies. Whenever a stamping mechanism wears out, we must replace it with a new one to stay in business. We are considering which of two stamping mechanisms to buy. The company’s tax rate is 21%, and currently have 10% required rate. The company uses straight line depreciation (depreciates the full amount) and is unable to sell the machines after they worn out. Machine A costs $1000 to buy and $100 per year to operate. It wears out and must be replaced every three years. Machine B costs $1400 to buy and $80 per year to operate. It lasts for four years and must then be replaced. Which machine should we go with and why? Please explain your answers and values for each machine.

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