Dell Case

Dell’s finance department is tasked with determining the net cash flows and NPV of a proposed new type of portable computer system. The corporate financial analytical tools such as capital budgeting is the key element in decision making process. A financial manager must be able to decide whether an investment is worth undertaking and be able to choose between two or more alternatives. This approach provides the analytical process by which organizations evaluate financial disclosures. Popular methods of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted cash flow and payback period.

Step one is determine a Free Cash Flow using a formula below:

Free Cash Flow= (Revenues-Costs-Depreciation) × (1-τ_c) + Depreciation-CapEx- ∆NWC

Upon Dell’s Income Statement for fiscal year ending February 01, 2013 the total 2012 revenue was $56,940.00

|Year 1 |Year 2 |Year 3 |Year 4 |Year 5 |

|3% |15% |10% |5% |5% |

| 1,708.20 | 1,964.43 | 2,160.87 | 2,268.92 | 2,382.36 |

Next, we need to determine the approximated Cost of Goods Sold, the annual gross profits and the Operating Income for the project.

Gross Profit Margin= Dell's 2012 EBITDA / Sales Operating Income = Revenue*Gross Margin

Gross Profit Margin =$ 4,223.00/$56900 = 7.42%

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Depreciation is: $212.60/5=$42.52

Following step is to identify the tax rate. It was suggested to use Dell’s 2012 corporate tax rate. Therefore Dell’s 2012 corporate tax rate can be calculated by:

Dells Tax Rate= (Income before Tax 2012-Net Income)/ Income before Tax 2012=

= (2,841.00-2,372.00)/2841.00=16.51%

The investment costs were to be approximated as requiring an initial investment of 10% of the Net PP E from 2012 ,additional investment =10% of initial investment after the first year of...