Texas Instruments is considering the launch of a new calculator, the TI-99, which would have quite a few additional features that they believe students would find useful. It would require a $5M investment today, and they have modeled 3 different scenarios for possibilities of the free cash flows that would be generated: (50%) Base case: $4M/year for the next 3 years, starting one year from now (25%) Worst case: $2M/year for the next 3 years, starting one year from now (25%) Best case: $6M/year for the next 3 years, starting one year from now, and then $500K perpetually after that In all 3 scenarios, they expect launching the TI-99 will hurt the free cash flows they generate from their current TI-84. They currently expect free cash flows of $10M per year for the next 3 years, starting one year from now, but if the TI-99 is launched they would expect a 5% decrease in free cash flows each year. Texas Instruments has a capital structure that includes $40M of debt, $20M of preferred stock, and $60M of common stock. The average cost of debt is 9%. Preferred stock was initially sold for $100/share but with strong results now sells for $120/share and pays a guaranteed $6 dividend. The risk-free rate is 5% and the expected return of the market is 11%. Texas Instruments’ beta is 1.2 and its corporate tax rate is 15%. What is the expected NPV of the project?
- Texas Instruments is considering the launch of a new calculator, the TI-99, which would have quite a few additional features that they believe students would find useful. It would require a $5M investment today, and they have modeled 3 different scenarios for possibilities of the
free cash flows that would be generated:
(50%) Base case: $4M/year for the next 3 years, starting one year from now
(25%) Worst case: $2M/year for the next 3 years, starting one year from now
(25%) Best case: $6M/year for the next 3 years, starting one year from now, and then $500K perpetually after that
In all 3 scenarios, they expect launching the TI-99 will hurt the free cash flows they generate from their current TI-84. They currently expect free cash flows of $10M per year for the next 3 years, starting one year from now, but if the TI-99 is launched they would expect a 5% decrease in free cash flows each year.
Texas Instruments has a capital structure that includes $40M of debt, $20M of
What is the expected NPV of the project?
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