The purpose of this final paper is analyze and evaluate two projects of the same public company. The paper contains assumptions, valuation analysis and an investment recommendation about each project selected. The two projects selected to do a valuation and project analysis are iPhone 6 and iWatch.
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Final Project - Basic Managerial Finance - pdf.pdf
The purpose of this final paper is analyze and evaluate two projects of the same public company. The paper contains assumptions, valuation analysis and an investment recommendation about each project selected. The two projects selected to do a valuation and project analysis are iPhone 6 and iWatch.
The purpose of this final paper is analyze and evaluate two projects of the same public company. The paper contains assumptions, valuation analysis and an investment recommendation about each project selected. The two projects selected to do a valuation and project analysis are iPhone 6 and iWatch.
The purpose of this final paper is analyze and evaluate two projects of the same public company. The paper contains assumptions, valuation analysis and an investment recommendation about each project. Its included in the paper cash flow projections, discounted cash flow (DCF), capital asset pricing model (CAPM), net present value (NPV) and internal rate of return (IRR) for each projected selected. I chose Apple Inc. for many reasons. Firstly, the company is very innovative. Apple Inc. made a revolution in mobile device and computers. Like, iPhone, iOS system, iPad and other products that promoted a great innovation in technology industry. Secondly, the company has a high market value. Nowadays Apples worth close to U$602 billion 1 . Finally, the firm is much admired around the world. For example, Apple was elected by Fortune magazine the most company admired of the world 2 . I really interested about Apple. So I chose this public company for my final project. Also, the two projects selected to do a valuation and project analysis are iPhone 6 and iWatch. The main sources are from Yahoo Finance, Apple 10-K (2013) and Bloomberg. All calculations and projections was made in excel. Its attached an appendix. 2 iWatch assumptions
Apple Inc. has an excellent credibility and famous brand. The credibility and brand will increase the profit. In general, markets have great expectations about iWatch. iWatch has an innovation factor and Apple need innovation. By the definition Apple is a innovate company. Economic conditions will contribute to increase the sales. As gross domestic product (GDP) will increase in United States and China over next years. As The Economist show a progressive increase of GDP for both countries 3 . Consequently consumers going to buy more and Apple will produce more. US and China are very important market for Apple. I assumed 10% growth sales per year. I assumed iWatch cost per unit $300.00. Fixed costs are $2 billion per year. Depreciation is $500 million per year. The total investment required to develop iWatch is $2.5 billion.
1 http://finance.yahoo.com/q?s=AAPL 2 http://archive.fortune.com/magazines/fortune/most-admired/2012/snapshots/670.html?iid=splwinners 3 http://www.economist.com/blogs/graphicdetail/2014/08/chinese-and-american-gdp-forecasts 2.1 CAPM The risk free for iWatch project is 10 yr treasury bill 4 . The beta used 1. Because iWatch has more risk than Apple Inc (Beta: 074). Because its a new product. The E(Rm) was chose S&P 500 5 . Because S&P 500 covers great part of market return and increases accurate of calculation. After I applied CAPM in iWatch project, the result is 22.02%. Just to remember all calculations were made in excel.
Apple debts is 83.45 million 6 is based in Yahoo Finance. Apple stock price is $100.00 based on Yahoo Finance. Equity was calculated stock price x shares outstanding 602 billion. 35.00% taxes based taxable income in Ross, Westerfield, Jordan (2012) Fundamentals of Corporate Finance. Re is 22.02% based CAPM calculations. Rd = 3.83 7
The WACC theory was applied in iPhone project is below.
WACC=(E/V) x Re +(D/V) x Rd x (1-Tc) Debt= 83,45 million Equity= stock price x shares outstanding = 100 x 6,02 billion = 602 billion V=Debt + Equity= 685,45 billion Tc = 35% Rd= 3.83% Re= 22.02% WACC=19,56% 2.3 DCF, NPV and IRR
4 http://www.treasury.gov/resource-center/data-chart-center/interest- rates/Pages/TextView.aspx?data=yield 5 http://www.bloomberg.com/quote/SPX:IND 6 http://finance.yahoo.com/q?s=AAPL 7 http://online.wsj.com/news/articles/SB10001424127887324482504578454691936382274 Im going to apply the DCF, NPV and IRR methods to ensure the feasibility of this project and profitability. The DCF, NPV and IRR are based in cash flow projections and WACC. In Appendix A has iWatch income statement, cash flow and other issues.
So, iWatch should be accepted. Because iWatch has a NPV positive (3.2 bi), 63% IRR and a 2 years payback. 3 iPhone 6 assumptions
The second project analyzed is iPhone 6. Im going to suppose some assumptions that will affect the cash flow and valuation. Apple Inc. has an excellent credibility and famous brand. The credibility and brand will increase the profit. Because people trust and want iPhone 6. I think Apple will sell 70 million iPhone 6 in 2015. In next two years iPhone sales will increase 3% per year. In 2018 and 2019 Apple will decrease 30% sales. The sales decrease can be explained because Apple will launch the iPhone 7. I considered the iPhone 6 cost per unit $300.00. Because Wall Street Journal article 8
said the cost of unit iPhone 5 is around $215.00. But iPhone 6 will have more gadget, technology and sapphire screen. In my point of view, I believe these variables will increase $300.00 cost per unit. Fixed costs are $8 billion per year.
8 http://blogs.wsj.com/tech-europe/2013/09/30/how-much-does-it-cost-to-make-an-iphone/ Depreciation is $200 million per year. The total investment required to iPhone 6 is $7 billion. 3.1 CAPM
The risk free for iPhone 6 project is 10 yr treasury bill 9 . The beta used 0.74 based on Yahoo Finance 10 . The E(Rm) was chose S&P 500. Because S&P 500 11 covers great part of market return and increase accurate of calculation. E (Ri) =rf +i [E (Rm) rf] rf = = 2.41 = 0.74 E (Rm)= 22.02% (date: 08/22/2014) E(Ri) =16,92% 3.2 WACC model
Apple debts is 83,45 million 12 is based in Yahoo Finance. Apple stock price is $100.00 based on Yahoo Finance. Equity was calculated stock price x shares outstanding 602 billion. 35% taxes based taxable income in Ross, Westerfield, Jordan (2012) Fundamentals of Corporate Finance. Rd is 3.83 13 . Re is 16,92% based CAPM calculations. The WACC theory was applied in iPhone project is below.
WACC=(E/V) x Re +(D/V) x Rd x (1-Tc) Debt= 83.45 million Equity= stock price x shares outstanding = 100 x 6.02 billion = 602 billion Debt + Equity= 685.45 billion Tc = 35.00% Rd= 3.83% Re= 16.92% WACC=15.16%
iPhone has NPV positive ($14.31 bi), 104% IRR and a 1 year payback. So iPhone 6 should be accepted. 4 Conclusion
My investment recommendation is Apple should accept both projects. Because for 4 factors. Firstly, Apple needs innovation and iWatch can bring it back. As I mentioned before by definition Apple is innovative. Secondly, the financial and project analysis show an excellent return, payback and IRR. On the one hand Apple can assure your profitability with iPhone. On the other hand Apple can bring back your innovation with iWatch. Finally, world economic conditions will incentive Apple sales. So Apple should take both projects. There is a table that shows financial indicators for each project.