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Net cash flows and NPV

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You have just been hired by Dell Computers in its capital budgeting division. Your first assignment is to determine the net cash flows and NPV of a proposed new type of portable computer system similar in size to a Blackberry handheld, but which has the operating power of a high-end desktop system.

Development of the new system will initially require an investment equal to 10% of net property, plant, and equipment (PPE) for the fiscal year ended Feb. 1, 2008. The project will then require an additional investment equal to 10% of the initial investment after the first year of the project, a 5% of initial investment after the second year, and 1% of initial investment after the third, fourth, and fifth years. The product is expected to have a life of five years. First-year revenues for the new product are expected to be 3% of total revenue for Dell's fiscal year ended Feb. 1, 2008. The new product's revenues are expected to grow at 15% for the second year, then 10% for the third, and 5% annually for the final two years of the expected life of the project. Your job is to determine the rest of the cash flows associated with this project. Your boss has indicated that the operating costs and net working capital requirements are similar to the rest of the company's products and that depreciation is straight-line for capital budgeting purposes. Welcome to the "real world." Since your boss hasn't been much help, here are some tips to guide your analysis:

Obtain Dell's financial statements. (If you "really" worked for Dell you would already have this data, but at least here you won't get fired if your analysis is off target.) Download the annual income statements, balance sheets, and cash flow statements for the last four fiscal years from MarketWatch (www. marketwatch.com). Enter Dell's ticker symbol (DELL) and then go to "Financials." Export the statements to Excel by right-clicking while the cursor is inside each statement.

Calculate the net working capital required each year by assuming that the level of NWC will be a constant percentage of the project's sales. Use Dell's 2007 NWC/Sales to estimate the required percentage. (Use only accounts receivable, accounts payable, and inventory to measure working capital. Other components of current assets and liabilities are harder to interpret and not necessarily reflective of the project's required NWC-e.g., Dell's cash holdings.)

1.) Develop a five-year time line in order to complete the following questions:
Find Revenue Calculate based on the Growth rate and find the information from the data case.

2.) Find Operating Income by using Margin 8.48%

3.) Calculate the Depreciation-by using a ten-year straight line method.
Tax Rate: 21.91%

4.) Determine the net cash flows and NPV of a proposed new type of portable computer system

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Solution Summary

The solution explains how the calculate the net cash flows for the project and determine the NPV