Apple Inc. has just developed a new budget iPhone, named iPhone C. The budget phone will contain a 1.5GHz processor, 4.7’ display with 312 pixel per-inch display, 8-megapixel rear facing camera and a 2000 mAh battery. Total component costs equate to $133.00. Labour hours for this phone come to 8 per unit at a price of $4.50 per hour. This budget phone is intended to help the tech company expand further into emerging market.
iPhone C, while expected to expand market share, is also likely to cannibalize margins on its high-end smartphones which are currently at 80% based on component and labour costs of $241.00 (iPhone C margins are expected to be half of iPhone 5s’). Cannibalization is expected to be static for 2 years, after which, iPhone 6 will be released and sales are expected to rebound.
The iPhone C will be introduced to the markets with region and language specific marketing & PR campaigns. Additionally, customer support will require training to deal with inquiries for the new product. Given Apple’s global marketing budget of $1b annually, 41% of which is for the phone division, 50% of which will be allocated to regional iPhone C marketing budgets and distributed based on where market penetration is expected to be greatest based on budget handset sales
Application of advanced accounting techniques allows for the avoidance of much corporate tax, and thus taxes are only due based on regional profits. Patenting the new technology in each region will cost a one-time fee $3bn which will be allocated in the same percentage as expected 1st year sales of the budget phone and expenses fully in the year incurred. Funds for this cost will be fully raised through an ‘interest only’ bond issue at a very generous 10%. The bond will be repaid in full at maturity in 3 years.
Approval to sell the budget iPhone in each of the regional markets requires a one-time application to each regional communication agencies at a total cost of $2bn, which also is to be to be allocated regionally in the same percentage as patent costs. Assuming approval is granted, sales of the budget phone are expected to grow at rates stated in the Table below.
Notes:
• Apple’s app annual revenue is $150 per user (assume one user owns 1 handset), 30% of which Apple retains.
• Upgraded factory equipment costs will be nearly $2bn, for which Apple is responsible for and intends to depreciate equally over all regions over its 3 year life. The equipment is expected to have a salvage value of $250mn.
• Logistic costs related to iPhone 5 can be ignored.
• Depreciation is done via the straight line method.
• Assume a tax rate of 30% & a required after-tax required rate of return is 7%
INSTRUCTIONS:
1. Determine in which region the iPhone C is expected to be the best performer using NPV analysis technique.
2. Include a Profit/Loss Statement in support of your answer.
3. Assignments must be supported with solutions page(s) and a RMIT-VN Statement of Authorship to be accepted. The deadline is 15.00 PM Monday, 26th August 2013.
HINTS:
1. The assignment question asks you to find out which region (market) that the budget Iphone C performs the best i.e. having the highest Net Present Value (NPV). Therefore, you should use a 7-step NPV analysis and prepare the 2 statements - P&L statement and Cash-Flows statement – for each region to find out the NPV of the project in each region to answer the question.
2. To well prepare the P&L statement, you should estimate all the revenues and relevant costs of the budget Iphone C project in each region based on the information and data given in the question to find out the amount of tax payment. Some calculations based on the data given should be performed before you can find out the relevant revenues and costs, so, identify in the question the information you need. Make sure that tax-related items such as book gain (loss) and salvage value are taken care of.
3. Regarding the Cash Flows statement, please identify and pay good attention to the treatment relevant cash flows and costs such as working capital, sunk cost, opportunity cost, side-effect cost, and finance cost and their timing to better estimate the NPV. Read the question carefully to identify those cash-flows and review the slides for the treatment and timing of each type of costs and cash-flows.
Please help me solve this problem, please!
iPhone C, while expected to expand market share, is also likely to cannibalize margins on its high-end smartphones which are currently at 80% based on component and labour costs of $241.00 (iPhone C margins are expected to be half of iPhone 5s’). Cannibalization is expected to be static for 2 years, after which, iPhone 6 will be released and sales are expected to rebound.
The iPhone C will be introduced to the markets with region and language specific marketing & PR campaigns. Additionally, customer support will require training to deal with inquiries for the new product. Given Apple’s global marketing budget of $1b annually, 41% of which is for the phone division, 50% of which will be allocated to regional iPhone C marketing budgets and distributed based on where market penetration is expected to be greatest based on budget handset sales
Application of advanced accounting techniques allows for the avoidance of much corporate tax, and thus taxes are only due based on regional profits. Patenting the new technology in each region will cost a one-time fee $3bn which will be allocated in the same percentage as expected 1st year sales of the budget phone and expenses fully in the year incurred. Funds for this cost will be fully raised through an ‘interest only’ bond issue at a very generous 10%. The bond will be repaid in full at maturity in 3 years.
Approval to sell the budget iPhone in each of the regional markets requires a one-time application to each regional communication agencies at a total cost of $2bn, which also is to be to be allocated regionally in the same percentage as patent costs. Assuming approval is granted, sales of the budget phone are expected to grow at rates stated in the Table below.
Notes:
• Apple’s app annual revenue is $150 per user (assume one user owns 1 handset), 30% of which Apple retains.
• Upgraded factory equipment costs will be nearly $2bn, for which Apple is responsible for and intends to depreciate equally over all regions over its 3 year life. The equipment is expected to have a salvage value of $250mn.
• Logistic costs related to iPhone 5 can be ignored.
• Depreciation is done via the straight line method.
• Assume a tax rate of 30% & a required after-tax required rate of return is 7%
INSTRUCTIONS:
1. Determine in which region the iPhone C is expected to be the best performer using NPV analysis technique.
2. Include a Profit/Loss Statement in support of your answer.
3. Assignments must be supported with solutions page(s) and a RMIT-VN Statement of Authorship to be accepted. The deadline is 15.00 PM Monday, 26th August 2013.
HINTS:
1. The assignment question asks you to find out which region (market) that the budget Iphone C performs the best i.e. having the highest Net Present Value (NPV). Therefore, you should use a 7-step NPV analysis and prepare the 2 statements - P&L statement and Cash-Flows statement – for each region to find out the NPV of the project in each region to answer the question.
2. To well prepare the P&L statement, you should estimate all the revenues and relevant costs of the budget Iphone C project in each region based on the information and data given in the question to find out the amount of tax payment. Some calculations based on the data given should be performed before you can find out the relevant revenues and costs, so, identify in the question the information you need. Make sure that tax-related items such as book gain (loss) and salvage value are taken care of.
3. Regarding the Cash Flows statement, please identify and pay good attention to the treatment relevant cash flows and costs such as working capital, sunk cost, opportunity cost, side-effect cost, and finance cost and their timing to better estimate the NPV. Read the question carefully to identify those cash-flows and review the slides for the treatment and timing of each type of costs and cash-flows.
Please help me solve this problem, please!
