The Financial Viability of IBM’s New Tablet Computer

by | Oct 3, 2023 | finance

 

You have just been hired by Internal Business Machines Corporation (IBM) in their capital budgeting division. Your first assignment is to determine the free cash flows and NPV of a proposed new type of tablet computer similar in size to an iPad but with the operating power of a high-end desktop system.

Point 2: The product is expected to have a life of five years.

Point 3: First-year revenues for the new product are expected to be 3% of IBM’s total revenue for the latest fiscal year using fiscal year 2019 or data from 12/31/2019.

Point 4: 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 (implying the project will have the same ratio of EBITDA to sales and working capital to sales) and that depreciation is straight-line (over 5 years) for capital budgeting purposes. Since your boss hasn’t been much help (welcome to the “real world”!), here are some tips to guide your analysis:

Point 6: Determine the annual depreciation by assuming IBM depreciates these assets by the straight-line method over a five-year life (i.e., depreciate the ‘cost of the new system’ in Point 1).

Point 7: Determine IBM’s tax rate by using the current U.S. federal corporate income tax rate (Use an estimated 21% for the corporate tax rate).

Point 8: In year 1, you are going to increase NWC using the NWC / Sales ratio for IBM in 12/31/2019 using only A/R, A/P, and inventory to measure NWC (use Table 8.3 and 8.4 as a guide for how to bring the increase in NWC into your FCF estimate in year one and take it back out in year 5—for simplicity purposes we are going to assume that NWC remains fixed in years 2 through 4 and then it is recaptured in year 5).

Point 9: To determine the free cash flow, deduct the additional capital investment and the change in net working capital each year (note: using information from Point 8, the NWC will only change in years 1 and 5—see Table 8.3 line item 12 and Table 8.4 as an example).

Point 10: 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.

Point 11: Perform a sensitivity analysis by varying the project forecasts as follows:
a. Suppose first year sales will equal 2%–4% of IBM’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%

 

Sample solution

Dante Alighieri played a critical role in the literature world through his poem Divine Comedy that was written in the 14th century. The poem contains Inferno, Purgatorio, and Paradiso. The Inferno is a description of the nine circles of torment that are found on the earth. It depicts the realms of the people that have gone against the spiritual values and who, instead, have chosen bestial appetite, violence, or fraud and malice. The nine circles of hell are limbo, lust, gluttony, greed and wrath. Others are heresy, violence, fraud, and treachery. The purpose of this paper is to examine the Dante’s Inferno in the perspective of its portrayal of God’s image and the justification of hell. 

In this epic poem, God is portrayed as a super being guilty of multiple weaknesses including being egotistic, unjust, and hypocritical. Dante, in this poem, depicts God as being more human than divine by challenging God’s omnipotence. Additionally, the manner in which Dante describes Hell is in full contradiction to the morals of God as written in the Bible. When god arranges Hell to flatter Himself, He commits egotism, a sin that is common among human beings (Cheney, 2016). The weakness is depicted in Limbo and on the Gate of Hell where, for instance, God sends those who do not worship Him to Hell. This implies that failure to worship Him is a sin.


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God is also depicted as lacking justice in His actions thus removing the godly image. The injustice is portrayed by the manner in which the sodomites and opportunists are treated. The opportunists are subjected to banner chasing in their lives after death followed by being stung by insects and maggots. They are known to having done neither good nor bad during their lifetimes and, therefore, justice could have demanded that they be granted a neutral punishment having lived a neutral life. The sodomites are also punished unfairly by God when Brunetto Lattini is condemned to hell despite being a good leader (Babor, T. F., McGovern, T., & Robaina, K. (2017). While he commited sodomy, God chooses to ignore all the other good deeds that Brunetto did.

Finally, God is also portrayed as being hypocritical in His actions, a sin that further diminishes His godliness and makes Him more human. A case in point is when God condemns the sin of egotism and goes ahead to commit it repeatedly. Proverbs 29:23 states that “arrogance will bring your downfall, but if you are humble, you will be respected.” When Slattery condemns Dante’s human state as being weak, doubtful, and limited, he is proving God’s hypocrisy because He is also human (Verdicchio, 2015). The actions of God in Hell as portrayed by Dante are inconsistent with the Biblical literature. Both Dante and God are prone to making mistakes, something common among human beings thus making God more human.

To wrap it up, Dante portrays God is more human since He commits the same sins that humans commit: egotism, hypocrisy, and injustice. Hell is justified as being a destination for victims of the mistakes committed by God. The Hell is presented as being a totally different place as compared to what is written about it in the Bible. As a result, reading through the text gives an image of God who is prone to the very mistakes common to humans thus ripping Him off His lofty status of divine and, instead, making Him a mere human. Whether or not Dante did it intentionally is subject to debate but one thing is clear in the poem: the misconstrued notion of God is revealed to future generations.

 

References

Babor, T. F., McGovern, T., & Robaina, K. (2017). Dante’s inferno: Seven deadly sins in scientific publishing and how to avoid them. Addiction Science: A Guide for the Perplexed, 267.

Cheney, L. D. G. (2016). Illustrations for Dante’s Inferno: A Comparative Study of Sandro Botticelli, Giovanni Stradano, and Federico Zuccaro. Cultural and Religious Studies, 4(8), 487.

Verdicchio, M. (2015). Irony and Desire in Dante’s” Inferno” 27. Italica, 285-297.

Sample Answer

Sample Answer

 

The Financial Viability of IBM’s New Tablet Computer
Introduction
In this analysis, we will evaluate the financial viability of IBM’s proposed new tablet computer. We will calculate the free cash flows and the net present value (NPV) of the project. Additionally, we will perform a sensitivity analysis by varying the project forecasts to assess their impact on the financial outcomes.

Methodology
To conduct our analysis, we will consider the following points:

Product Life: The new tablet computer is expected to have a life of five years.

First-Year Revenues: First-year revenues for the new product are projected to be 3% of IBM’s total revenue for the latest fiscal year (using fiscal year 2019 or data from 12/31/2019).

Revenue Growth: The new product’s revenues are expected to grow at a rate of 15% in the second year, followed by 10% in the third year and 5% annually for the final two years of the project’s expected life.

Operating Costs and Net Working Capital: The project will have similar operating costs and net working capital requirements as the rest of the company. We will assume a ratio of EBITDA to sales and working capital to sales consistent with IBM’s historical data.

Depreciation: Depreciation will be calculated using the straight-line method over a five-year life.

Tax Rate: We will use the current U.S. federal corporate income tax rate of 21% to determine IBM’s tax liability.

Net Working Capital: In year 1, we will increase net working capital (NWC) using the NWC/Sales ratio for IBM in 12/31/2019, considering accounts receivable (A/R), accounts payable (A/P), and inventory.

Free Cash Flow Calculation: Free cash flow will be determined by deducting additional capital investment and changes in net working capital each year.

NPV Calculation: We will use Excel to calculate the NPV of the project with a 12% cost of capital.

IRR Calculation: The internal rate of return (IRR) will also be calculated using Excel’s IRR function.

Analysis
Based on the provided information, we can now proceed with our analysis and calculations:

Calculate the annual depreciation by assuming IBM depreciates these assets by the straight-line method over a five-year life.

Determine IBM’s tax liability by applying the current U.S. federal corporate income tax rate of 21%.

Increase net working capital in year 1 using the NWC/Sales ratio for IBM in 12/31/2019 (considering A/R, A/P, and inventory).

Calculate free cash flow by deducting additional capital investment and changes in net working capital each year.

Use Excel to determine the NPV of the project with a 12% cost of capital.

Calculate the IRR of the project using Excel’s IRR function.

Sensitivity Analysis
To assess the impact of various factors on the project’s financial outcomes, we will perform a sensitivity analysis by varying the project forecasts as follows:

a. Suppose first-year sales will equal 2%–4% of IBM’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%.

By analyzing these different scenarios, we can better understand how changes in key variables may affect the project’s profitability and make informed decisions based on these insights.

Conclusion
In conclusion, by conducting a thorough analysis of IBM’s proposed new tablet computer, we can determine its financial viability. Through calculations of free cash flows, NPV, and considering various scenarios in a sensitivity analysis, we will gain valuable insights into the project’s potential profitability and risks. This comprehensive assessment will enable IBM to make informed decisions regarding its investment in this new product.

 

 

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