Case Study:
1. Obtain Dell's financial statements. (If you really worked for Dell you would already have this data, but at least you won't get fired if your analysis is off target.) Down load the annual income statements, balance sheets, and cash flow statements for the last fiscal years from Yahoo! Finance (finance.yahoo.com). Enter Dell's ticker symbol and then go to ``financials."
2. You are now ready to estimate the Free Cash Flow for the new product. Compute the Free Cash Flow for each year using Eq. 8.5:
Free Cash Flow=(Revenues-Costs-Depreciation) x (1-T) + Depreciation-Capital Expenditure-Change in Net Working Capital
Set up the timeline and computation of free cash flow in separate, contigous columns for each year of the project life. Be sure to make outflows negative and inflows positive.
a. Assume that the project's profitability will be similar to Dell's existing projects in 2012 and estimate (revenues-costs) each year by using the 2012 EBITDA/Sales profit margin. Calculate EBITDA as EBIT + Depreciation expense from the cash flow statement.
b. Determine the annual depreciation by assuming Dell depreciates thes assets by straight-line method over a 5-year life.
c. Determine Dell's tax rate by using the income tax rate in 2012.
d. Calculate the net working capital required rach year by assuming that the level of Net working capital will be a constant percentage of the project's sales. Use Dell's 2012 net working capital/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 net woking capital- for example, Dell's cash holdings.)
e. To determine the free cash flow, deduct the additional investment and the change in net working capital each year.
3. Use Excel to determine the NPV of the project with a 12% cost of capital. Also calculate the IRR of the project using Excel's IRR function.
4.Perform a sensitivity analysis by varying the project forecasts as follows:
a. Suppose first year sales will equal 2%-4% of Dell's revenues.
b. Suppose the cost of capital is 10%-15%.
c. Suppose revenue growth is constant after the first year at a rate of 0%-10%.