4.- Dell is working on a new tablet computer that it thinks will revolutionize the tablet market. They only plan to produce the new tablet for 4 years, after which it will stop making the product due to obsolescence. The engineers just finished their $12million study to show that the new tablet technology works. It will require the purchase of new equipment valued at $5 billion that they will depreciate to zero over 5 years. They believe that they can sell it in year 4 for $0.5 billion. It will also require the use of existing equipment that currently has a market value of $0.8 billion. It is already fully depreciated, and would be completely worthless at the end of 4 years ifused in this project. They will also need inventory to increase by $2 billion and accounts payable to increase by $1 billion, both immediately. They would both stay at these elevated levels throughout the life of the tablet project. Dell expects the following changes over the next four years: Year 1 $5.2 billion $1.6 billion $1.4 billion $1.0 billion Year 20 $7.3 billion $2.6 billion $1.8 billion $1.0 billion Year 4 $4.1 billion $1.6 billion $0.4 billion $0a Year 3 $6.1 billion $2.3 billion $1.7 billiona $1.0 billiona Revenues COGS Wages Interest expense Dell's discount rate is 12%, and their tax rate is 30%. Should they invest in this new tablet?
4.- Dell is working on a new tablet computer that it thinks will revolutionize the tablet market. They only plan to produce the new tablet for 4 years, after which it will stop making the product due to obsolescence. The engineers just finished their $12million study to show that the new tablet technology works. It will require the purchase of new equipment valued at $5 billion that they will depreciate to zero over 5 years. They believe that they can sell it in year 4 for $0.5 billion. It will also require the use of existing equipment that currently has a market value of $0.8 billion. It is already fully depreciated, and would be completely worthless at the end of 4 years ifused in this project. They will also need inventory to increase by $2 billion and accounts payable to increase by $1 billion, both immediately. They would both stay at these elevated levels throughout the life of the tablet project. Dell expects the following changes over the next four years: Year 1 $5.2 billion $1.6 billion $1.4 billion $1.0 billion Year 20 $7.3 billion $2.6 billion $1.8 billion $1.0 billion Year 4 $4.1 billion $1.6 billion $0.4 billion $0a Year 3 $6.1 billion $2.3 billion $1.7 billiona $1.0 billiona Revenues COGS Wages Interest expense Dell's discount rate is 12%, and their tax rate is 30%. Should they invest in this new tablet?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:4.- Dell is working on a new tablet computer that it thinks will revolutionize the tablet market. They
only plan to produce the new tablet for 4 years, after which it will stop making the product due to
obsolescence. The engineers just finished their $12million study to show that the new tablet
technology works. It will require the purchase of new equipment valued at $5 billion that they will
depreciate to zero over 5 years. They believe that they can sell it in year 4 for $0.5 billion. It will
also require the use of existing equipment that currently has a market value of $0.8 billion. It is
already fully depreciated, and would be completely worthless at the end of 4 years ifused in this
project. They will also need inventory to increase by $2 billion and accounts payable to increase by
$1 billion, both immediately. They would both stay at these elevated levels throughout the life of the
tablet project.
Dell expects the following changes over the next four years:
Year 1
$5.2 billion
$1.6 billion
$1.4 billion
$1.0 billion
Year 20
$7.3 billion
$2.6 billion
$1.8 billion
$1.0 billion
Year 4
$4.1 billion
$1.6 billion
$0.4 billion
$0a
Year 3
$6.1 billion
$2.3 billion
$1.7 billiona
$1.0 billiona
Revenues
COGS
Wages
Interest expense
Dell's discount rate is 12%, and their tax rate is 30%. Should they invest in this new tablet?
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