Ibm Corporate Finance - Fundamentals of Capital Budgeting

Jonathan Berk, Peter DeMarzo

Data Case for Chapter 8: Fundamentals of Capital Budgeting1

You have just been hired by Dell Computers IBM in their capital budgeting

division. Your first assignment is to determine the net cash flows and NPV

of a proposed new type of portable computer system similar in size to a

BlackBerry, a popular gadget with many MBA students, which has an iPad

but with the operating power of a high-end desktop system.

Development of the new system will initially require an initial investment

equal to 10% of IBM’s net Property, Plant, and Equipment (PPE) for at the

end of fiscal year 2014. ended January 30, 2009. The project will then

require an additional investment equal to 10% of initial investment after

the first year of the project, a 5% increase after the second year, and a

1% increase after the third, fourth, and fifth years.

The product is expected to have a life of five years. First-year revenues

for the new product are expected to be 3% of IBM’s total revenue for

Dell’s the fiscal year 2014. ended January 30, 2009. 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 and that

depreciation is straight-line for capital budgeting purposes. Welcome to

the “real world.” Since your boss hasn’t been much help, here are some

tips to guide your analysis:

1. Obtain Dell’s IBM’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.) Download the annual income

statements, balance sheets, and cash flow statements for the