Apple is planning to launch a new easy-to-use kitchen appliance with a touchscreen interface, the iToaster. Apple expects to sell 1 million and 2 million units in the first two years after launch, respectively, and then to discontinue this product. Each unit will sell for $200 in the first year after launch, and $150 in the second year. The costs of components and labor are $60 per unit, while salaries and other expenses add up to $10 million in each year the product is sold. The factory that manufactures the iToaster requires an investment of $60 million right now and $30 million one year from now. It will take one year to complete, so production will only start in the second year. The factory will be depreciated linearly to zero over 5 years after its completion. To get production up and running, Apple has to buy components worth $5 million immediately before the launch of the product, and add another $2 million worth of components to its inventory exactly one year later. The firm's marginal tax rate is 34%. What is the annual depreciation (in $ million)? What is the net operating profit after taxes in year 2 (in $ million)? What is the net operating profit after taxes in year 3 (in $ million)? What is the incremental cash flow (CF) at the end of year 0 (in $ million)? What is the incremental cash flow (CF) at the end of year 1 (in $ million)? What is the incremental cash flow (CF) at the end of year 2 (in $ million)?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter14: Pricing Techniques And Analysis
Section: Chapter Questions
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Apple is planning to launch a new easy-to-use kitchen appliance with a touchscreen interface, the iToaster. Apple expects to sell 1 million and 2 million units in the first two years after launch, respectively, and then to discontinue this product. Each unit will sell for $200 in the first year after launch, and $150 in the second year. The costs of components and labor are $60 per unit, while salaries and other expenses add up to $10 million in each year the product is sold.

The factory that manufactures the iToaster requires an investment of $60 million right now and $30 million one year from now. It will take one year to complete, so production will only start in the second year. The factory will be depreciated linearly to zero over 5 years after its completion.

To get production up and running, Apple has to buy components worth $5 million immediately before the launch of the product, and add another $2 million worth of components to its inventory exactly one year later.

The firm's marginal tax rate is 34%.

What is the annual depreciation (in $ million)?

What is the net operating profit after taxes in year 2 (in $ million)?

What is the net operating profit after taxes in year 3 (in $ million)?

What is the incremental cash flow (CF) at the end of year 0 (in $ million)?

What is the incremental cash flow (CF) at the end of year 1 (in $ million)?

What is the incremental cash flow (CF) at the end of year 2 (in $ million)?

 

 

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