Corp Finance

1. What is the NPV of the first generation phone project, ignoring both the possibility of investing in the second generation project and the possibility of selling the equipment after two years?

Components of the $10M initial investment (all the figures are in thousands)

|Initial CAPX | 4,500.00 |

|SG&A | 1,900.00 |

|R&D | 2,100.00 |

|Investment in NWC | 1,500.00 |

|Total | 10,000.00 |

Assuming that the project is fully equity financed, the required rate of return is 17.6%.

rA = rf + betaA (market premium)

rA = 8% + 1.2 (8%) = 17.6%

Terminal Value of the first generation phone

The expected value of cash flows from the first-generation phones would either increase by 64.9% or decrease by 39.3% each year. Assuming that each event has 50% possibility to occur, the average growth rate of cash flow would be 12.8% (= [1.649 + (1-0.393)] / 2)

Thus, the terminal value = [CF2006 (1 + 12.8%)] / (17.6% - 12.8) = (1500 * 1.128) / (0.176 – 0.128) = 35,250

The annual projected free cash flow is as shown below (all the figures are in thousands)

CF = EBIAT + Depreciation – Investment

|  |2001 |2002 |2003 |2004 |2005 |2006 |

|(in thousands) | | | | | |  |

|Net Sales | | 8,600.00 | 14,000.00 | 18,000.00 | 14,500.00 | 8,000.00 |

| |- | | | | | |

|COGS | | 3,500.00 |...