Question 1

IBM - Income Stament

Breakdown 2020 2019 2018 2017

Total Revenue 73,621,000 77,147,000 79,590,000 79,139,000
Operating Revenue 73,621,000 77,147,000 79,590,000 79,139,000
Cost of Revenue 38,046,000 40,659,000 42,655,000 42,913,000
Gross Profit 35,575,000 36,488,000 36,936,000 36,227,000
Operating Expense 28,680,000 25,857,000 23,651,000 24,372,000
Selling General and Administrative 21,850,000 19,754,000 18,863,000 19,555,000
General & Administrative Expense 20,308,000 18,107,000 17,397,000 18,110,000
Salaries and Wages 3,508,000 1,008,000 959,000 1,542,000
Other G and A 16,800,000 17,099,000 16,438,000 16,568,000
Selling & Marketing Expense 1,542,000 1,647,000 1,466,000 1,445,000
Research & Development 6,333,000 5,989,000 5,379,000 5,787,000
Depreciation Amortization Depletion 1,123,000 762,000 435,000 496,000
Depreciation & amortization 1,123,000 762,000 435,000 496,000
Amortization 1,123,000 762,000 435,000 496,000
Amortization of Intangibles 1,123,000 762,000 435,000 496,000
Other Operating Expenses -626,000 -648,000 -1,026,000 -1,466,000
Operating Income 6,895,000 10,631,000 13,285,000 11,855,000
Net Non Operating Interest Income Expense -1,183,000 -995,000 -459,000 -471,000
Interest Income Non Operating 105,000 349,000 264,000 144,000
Interest Expense Non Operating 1,288,000 1,344,000 723,000 615,000
Other Income Expense -1,074,000 529,000 -1,482,000 17,000
Gain on Sale of Security 9,000 296,000 94,000 -44,000
Special Income Charges -109,000 -89,000 -67,000 -55,000
Write Off 109,000 89,000 67,000 55,000
Other Non Operating Income Expenses -974,000 322,000 -1,509,000 116,000
Pretax Income 4,637,000 10,166,000 11,342,000 11,400,000
Tax Provision -864,000 731,000 2,619,000 5,642,000
Net Income Common Stockholders 5,590,000 9,431,000 8,728,000 5,753,000
Net Income 5,590,000 9,431,000 8,728,000 5,753,000
Net Income Including Non-Controlling Interests 5,590,000 9,431,000 8,728,000 5,753,000
Net Income Continuous Operations 5,501,000 9,435,000 8,723,000 5,758,000
Net Income Discontinuous Operations 89,000 -4,000 5,000 -5,000
Average Dilution Earnings -2,000 0 -6,000 -2,000
Diluted NI Available to Com Stockholders 5,588,000 9,431,000 8,722,000 5,752,000
Basic EPS - 10.63 9.57 6.17
Diluted EPS - 10.56 9.52 6.14
Basic Average Shares - 887,200 912,000 932,800
Diluted Average Shares - 892,800 916,300 937,400
Total Expenses 66,726,000 66,516,000 66,306,000 67,285,000
Net Income from Continuing & Discontinued Operatio 5,590,000 9,431,000 8,728,000 5,753,000
Normalized Income 5,574,000 9,242,904 8,702,237 5,817,400
Interest Income 105,000 349,000 264,000 144,000
Interest Expense 1,288,000 1,344,000 723,000 615,000
Net Interest Income -1,183,000 -995,000 -459,000 -471,000
EBIT 5,925,000 11,510,000 12,065,000 12,015,000
EBITDA 12,620,000 - - -
Reconciled Cost of Revenue 32,474,000 35,362,000 38,610,000 38,868,000
Reconciled Depreciation 6,695,000 6,059,000 4,480,000 4,541,000
Net Income from Continuing Operation Net Minority I 5,501,000 9,435,000 8,723,000 5,758,000
Total Unusual Items Excluding Goodwill -100,000 207,000 27,000 -99,000
Total Unusual Items -100,000 207,000 27,000 -99,000
Normalized EBITDA 12,720,000 17,362,000 16,518,000 16,655,000
Tax Rate for Calcs 0 0 0 0
Tax Effect of Unusual Items -27,000 14,904 6,237 -39,600

EBITDA/Revenues 17.14%
own calculation
Question 1

IBM - Balance Sheets

Breakdown 2020 2019 2018

Total Assets 155,971,000 152,186,000 123,382,000
Current Assets 39,165,000 38,420,000 49,146,000
Cash, Cash Equivalents & Short Term Investments 13,812,000 8,868,000 11,997,000
Cash And Cash Equivalents 13,212,000 8,172,000 11,379,000
Other Short Term Investments 600,000 696,000 618,000
Receivables 18,738,000 23,795,000 30,563,000
Accounts receivable 7,132,000 7,870,000 7,432,000
Gross Accounts Receivable 7,483,000 8,169,000 7,741,000
Allowance For Doubtful Accounts Receivable -351,000 -299,000 -309,000
Other Receivables 11,606,000 15,925,000 23,131,000
Receivables Adjustments Allowances - -33,000 -38,000
Inventory 1,839,000 1,619,000 1,682,000
Work in Process 1,649,000 1,399,000 1,415,000
Finished Goods 190,000 220,000 266,000
Other Inventories - - 1,000
Prepaid Assets 2,206,000 2,101,000 2,378,000
Restricted Cash 463,000 141,000 225,000
Current Deferred Assets 2,107,000 1,896,000 2,300,000
Other Current Assets - - 1,000
Total non-current assets 116,805,000 113,766,000 74,237,000
Net PPE 14,726,000 15,005,000 10,793,000
Gross PPE 37,862,000 37,023,000 32,461,000
Properties 0 0 0
Land And Improvements 381,000 365,000 448,000
Buildings And Improvements 9,416,000 9,364,000 9,640,000
Machinery Furniture Equipment 19,684,000 18,577,000 18,292,000
Other Properties 8,381,000 8,717,000 4,081,000
Accumulated Depreciation -23,136,000 -22,018,000 -21,668,000
Goodwill And Other Intangible Assets 73,412,000 73,458,000 39,353,000
Goodwill 59,617,000 58,222,000 36,265,000
Other Intangible Assets 13,795,000 15,236,000 3,088,000
Investments And Advances 226,000 222,000 226,000
Long Term Equity Investment 172,000 184,000 192,000
Investments in Other Ventures Under Equity Method 172,000 184,000 192,000
Other Investments 54,000 38,000 34,000
Financial Assets 151,000 94,000 347,000
Non Current Accounts Receivable 7,509,000 8,988,000 9,507,000
Non Current Deferred Assets 11,690,000 7,654,000 7,892,000
Non Current Deferred Taxes Assets 9,241,000 5,182,000 5,216,000
Non Current Prepaid Assets 1,016,000 906,000 894,000
Defined Pension Benefit 7,848,000 7,118,000 4,929,000
Other Non Current Assets 227,000 321,000 296,000
Total Liabilities Net Minority Interest 135,245,000 131,201,000 106,452,000
Current Liabilities 39,869,000 37,701,000 38,227,000
Payables And Accrued Expenses 15,056,000 12,092,000 13,545,000
Payables 8,209,000 7,735,000 9,604,000
Accounts Payable 4,908,000 4,896,000 6,558,000
Total Tax Payable 3,301,000 2,839,000 3,046,000
Current Accrued Expenses 6,847,000 4,357,000 3,941,000
Pension & Other Post Retirement Benefit Plans Current 3,440,000 3,406,000 3,310,000
Current Debt And Capital Lease Obligation 8,540,000 10,177,000 10,207,000
Current Debt 7,183,000 8,797,000 10,207,000
Commercial Paper 0 304,000 2,995,000
Other Current Borrowings 7,183,000 8,493,000 7,212,000
Current Capital Lease Obligation 1,357,000 1,380,000 -
Current Deferred Liabilities 12,833,000 12,026,000 11,165,000
Current Deferred Revenue 12,833,000 12,026,000 11,165,000
Other Current Liabilities 10,287,000 7,763,000 7,251,000
Total Non Current Liabilities Net Minority Interest 95,376,000 93,500,000 68,225,000
Long Term Provisions 5,391,000 5,212,000 4,306,000
Long Term Debt And Capital Lease Obligation 57,929,000 57,981,000 35,605,000
Long Term Debt 54,355,000 54,102,000 35,605,000
Long Term Capital Lease Obligation 3,574,000 3,879,000 -
Non Current Deferred Liabilities 9,773,000 9,081,000 7,141,000
Non Current Deferred Taxes Liabilities 5,472,000 5,230,000 3,696,000
Non Current Deferred Revenue 4,301,000 3,851,000 3,445,000
Tradeand Other Payables Non Current 253,000 42,000 40,000
Non Current Accrued Expenses 279,000 299,000 320,000
Employee Benefits 20,335,000 19,141,000 18,889,000
Non Current Pension And Other Post-Retirement Benefit Plan 19,883,000 18,663,000 18,382,000
Derivative Product Liabilities 40,000 506,000 206,000
Other Non Current Liabilities 1,376,000 1,238,000 1,718,000
Total Equity Gross Minority Interest 20,726,000 20,985,000 16,930,000
Stockholders' Equity 20,597,000 20,841,000 16,796,000
Capital Stock 56,556,000 55,895,000 55,151,000
Common Stock 56,556,000 55,895,000 55,151,000
Retained Earnings 162,717,000 162,954,000 159,206,000
Treasury Stock 169,339,000 169,413,000 168,071,000
Gains Losses Not Affecting Retained Earnings -29,337,000 -28,597,000 -29,490,000
Other Equity Interest - 2,000 -
Minority Interest 129,000 144,000 134,000
Total Capitalization 74,952,000 74,943,000 52,401,000
Common Stock Equity 20,597,000 20,841,000 16,796,000
Capital Lease Obligations 4,931,000 5,259,000 -
Net Tangible Assets -52,815,000 -52,617,000 -22,557,000
Working Capital -704,000 719,000 10,919,000
Invested Capital 82,135,000 83,740,000 62,608,000
Tangible Book Value -52,815,000 -52,617,000 -22,557,000
Total Debt 66,469,000 68,158,000 45,812,000
Net Debt 48,326,000 54,727,000 34,433,000
Share Issued 2,242,969 2,237,997 2,233,427
Ordinary Shares Number 892,653 887,110 892,479
Treasury Shares Number 1,350,316 1,350,887 1,340,948
 2017
125,356,000
49,735,000
12,580,000
11,972,000
608,000
31,630,000
8,928,000
9,225,000
-297,000
22,702,000
-36,000
1,583,000
1,250,000
333,000
-
3,942,000
-
-
-
75,620,000
11,116,000
32,331,000
0
480,000
10,073,000
17,718,000
4,060,000
-21,215,000
40,529,000
36,788,000
3,741,000
122,000
90,000
90,000
32,000
757,000
10,005,000
6,399,000
4,862,000
1,161,000
 4,959,000
572,000
107,631,000
37,363,000
15,180,000
10,670,000
6,451,000
4,219,000
4,510,000
3,644,000
6,986,000
6,986,000
1,496,000
5,490,000
-
11,552,000
11,552,000
1,000
70,268,000
4,308,000
39,837,000
39,837,000
-
4,291,000
545,000
3,746,000
948,000
318,000
18,807,000
18,303,000
38,000
1,721,000
17,725,000
17,594,000
54,566,000
54,566,000
153,126,000
163,507,000
-26,592,000
1,000
131,000
57,431,000
17,594,000
-
-22,935,000
 12,372,000
64,417,000
-22,935,000
46,823,000
34,851,000
2,229,429
922,179
1,307,250
Question 1

IBM - Cash Flows

Breakdown 2020 2019 2018

Operating Cash Flow 18,197,000 14,770,000 15,247,000
Cash Flow from Continuing Operating Activities 18,198,000 14,771,000 15,248,000
Net Income from Continuing Operations 5,590,000 9,431,000 8,728,000
Operating Gains Losses -70,000 -1,096,000 123,000
Gain Loss On Sale of Business - - -
Depreciation Amortization Depletion 6,695,000 6,059,000 4,480,000
Depreciation & amortization 6,695,000 6,059,000 4,480,000
Depreciation 4,227,000 4,209,000 3,127,000
Amortization 2,468,000 1,850,000 1,353,000
Amortization of Intangibles 2,468,000 1,850,000 1,353,000
Deferred Tax -3,203,000 -1,527,000 853,000
Deferred Income Tax -3,203,000 -1,527,000 853,000
Stock based compensation 937,000 679,000 510,000
Other non-cash items -1,000 -1,000 -1,000
Change in working capital 8,249,000 1,225,000 554,000
Change in Receivables 5,297,000 502,000 1,006,000
Changes in Account Receivables 4,349,000 491,000 -345,000
Change in Inventory -209,000 67,000 -127,000
Change in Payables And Accrued Expense 138,000 -503,000 126,000
Change in Payable 138,000 -503,000 126,000
Change in Account Payable 138,000 -503,000 126,000
Change in Other Working Capital 3,023,000 1,159,000 -451,000
Investing Cash Flow -3,028,000 -26,936,000 -4,913,000
Cash Flow from Continuing Investing Activities -3,028,000 -26,936,000 -4,912,000
Capital Expenditure Reported -3,042,000 -2,370,000 -3,716,000
Net PPE Purchase And Sale -2,430,000 -1,749,000 -3,147,000
Purchase of PPE -2,618,000 -2,286,000 -3,395,000
Sale of PPE 188,000 537,000 248,000
Net Intangibles Purchase And Sale -612,000 -621,000 -569,000
Purchase of Intangibles -612,000 -621,000 -569,000
Net Business Purchase And Sale 167,000 -31,554,000 -139,000
Purchase of Business -336,000 -32,630,000 -139,000
Sale of Business 503,000 1,076,000 -
Net Investment Purchase And Sale -628,000 268,000 -554,000
Purchase of Investment -6,246,000 -3,693,000 -7,041,000
Sale of Investment 5,618,000 3,961,000 6,487,000
Net Other Investing Changes 475,000 6,720,000 -504,000
Financing Cash Flow -9,721,000 9,042,000 -10,469,000
Cash Flow from Continuing Financing Activities -9,721,000 9,043,000 -10,470,000
Net Issuance Payments of Debt -3,714,000 16,284,000 -301,000
Net Long Term Debt Issuance -2,861,000 18,881,000 -1,642,000
Long Term Debt Issuance 10,504,000 31,825,000 6,891,000
Long Term Debt Payments -13,365,000 -12,944,000 -8,533,000
Net Short Term Debt Issuance -853,000 -2,597,000 1,341,000
Net Common Stock Issuance -302,000 -1,633,000 -4,614,000
Common Stock Issuance - - -
Common Stock Payments -302,000 -1,633,000 -4,614,000
Cash Dividends Paid -5,797,000 -5,707,000 -5,666,000
Common Stock Dividend Paid -5,797,000 -5,707,000 -5,666,000
Net Other Financing Charges 92,000 98,000 112,000
End Cash Position 13,675,000 8,314,000 11,604,000
Changes in Cash 5,448,000 -3,123,000 -135,000
Effect of Exchange Rate Changes -87,000 -167,000 -495,000
Beginning Cash Position 8,314,000 11,604,000 12,234,000
Income Tax Paid Supplemental Data 2,253,000 2,091,000 1,745,000
Interest Paid Supplemental Data 1,830,000 1,685,000 1,423,000
Capital Expenditure -3,230,000 -2,907,000 -3,964,000
Issuance of Capital Stock - - -
Issuance of Debt 10,504,000 31,825,000 6,891,000
Repayment of Debt -13,365,000 -12,944,000 -8,533,000
Repurchase of Capital Stock -302,000 -1,633,000 -4,614,000
Free Cash Flow 14,967,000 11,863,000 11,283,000
 2017
16,724,000
16,724,000
5,753,000
14,000
0
4,541,000
4,541,000
3,021,000
1,520,000
1,520,000
-931,000
-931,000
534,000
1,000
6,813,000
1,297,000
419,000
18,000
47,000
47,000
47,000
5,451,000
-7,096,000
-7,096,000
-3,312,000
-2,769,000
-3,229,000
460,000
-544,000
-544,000
-701,000
-701,000
-
-1,054,000
-4,964,000
3,910,000
-2,028,000
-6,418,000
-6,417,000
3,447,000
 2,827,000
9,643,000
-6,816,000
620,000
-4,358,000
175,000
-4,533,000
-5,506,000
-5,506,000
-1,000
11,972,000
3,209,000
937,000
7,826,000
1,597,000
1,208,000
-3,773,000
175,000
9,643,000
-6,816,000
-4,533,000
12,951,000
 Question 2
IBM Yr 2020 3% 15% 10%
Items Y0 Y1 Y2 Y3
Revenue 73,621,000 2,208,630 2,539,925 2,793,917
Cost of Revenue 1,830,030 2,104,535 2,314,988
Profit Margin (EBITDA/Revenue) 17.14% 17.14% 17.14%
Project Profitability 378,600 435,390 478,929
Depreciation 294,520 294,520 294,520
EBIT 84,080 140,870 184,409
21% Income Tax Rate 17,657 29,583 38,726
Unlevered Net Income Free Cash Flow 66,423 111,287 145,683
Depreciation 294,520 294,520 294,520
Capital Expenditures 1,472,600 147,260 73,630 14,726
Increases Net Work Capital 80,579 12,087 9,267
Free Cash Flow -1,472,600 133,105 320,090 416,211

2b
Capital Expenditure Y0 Y1 Y2 Y3
0.10 Year 0 - 10% of PPE end of 2020 1,472,600
0.10 Year 1 - 10% 147,260
0.05 Year 2 - 5% 73,630
0.01 Year 3 - 1% 14,726
1,472,600 147,260 73,630 14,726

2b Answer line 26 - Depreciation by assuming IBM starigth-line method over 5 years

Depreciation Y0 Y1 Y2 Y3
Year 1-5 = Depreciate Year 0 over 5 yrs 1,472,600 294,520 294,520 294,520
Year 2-6 = Depreciate Year 1 over 5 yrs 29,452 29,452
Year 3-6 = Depreciate Year 2 over 4 yrs 18,408
Year 4-6 = Depreciate Year 3 over 3 yrs
Year 5-6 = Depreciate Year 4 over 2 yrs
Year 6 = Depreciate Year 5 over 1 year
Total Depreciation per year 1,472,600 294,520 323,972 342,380

2d Calculate the net working capital required each year by assuming that the level of NWC will be a constant percenta
the project’s sales. Use IBM’s NWC/Sales for the latest fiscal year to estimate the required percentage. (Use only accou
receivable, accounts payable, and inventory to measure working capital

Increases in Net Working Capital IBM Yr 2020 Y1 Y2 Y3

Net Receivables 18,738,000
Inventory 1,839,000
Accounts Payable 4,908,000
Net Working Capital 15,669,000
Sales 73,621,000
NWC /Sales 21.28% 80,579 92,665 101,932
Increase in NWC 80,579 12,087 9,267
 5% 5%
Y4 Y5 Ans
2,933,613 3,080,293
2,430,737 2,552,274
17.14% 17.14%
502,875 528,019 2a
294,520 294,520 2b
208,355 233,499
43,755 49,035 2c Tax Rate in 2020 - 21%
164,601 184,464
294,520 294,520 2b
14,726 14,726 2b
5,097 5,351 2d
439,298 458,907 2e

Y4 Y5

14,726 14,726
14,726 14,726

Y4 Y5
294,520 294,520 I have considered this calculation because it is a simple depreciation.
29,452 29,452
18,408 18,408
4,909 4,909 Aditional calculations
7,363

347,288 354,651

C will be a constant percentage of

d percentage. (Use only accounts

Y4 Y5
107,029 112,380
5,097 5,351
Question 3

Determine the NPV of the project with a 12% cost of capital. Also calculate the IRR.

Project cost of capital 12%

Years 0 1 2 3 4 5
Free cash flow -1,472,600 133,105 320,090 416,211 439,298 458,907
Discount Factor 1.000000 0.892857 0.797194 0.711780 0.635518 0.567427
PV - Free cash flow -1,472,600 118,843 255,174 296,250 279,182 260,396
NPV -559,840
IRR -6%
Question 4.a Case 1
IBM Yr 2020 2% 15% 10%
Items Y0 Y1 Y2 Y3
Revenue 73,621,000 1,472,420 1,693,283 1,862,611
Cost of Revenue 1,220,020 1,403,023 1,543,325
Profit Margin (EBITDA/Revenue) 17.14% 17.14% 17.14%
Project Profitability 252,400 290,260 319,286
Depreciation 294,520 294,520 294,520
EBIT -42,120 -4,260 24,766
21% Income Tax Rate -8,845 -895 5,201
Unlevered Net Income Free Cash Flow -33,275 -3,365 19,565
Depreciation 294,520 294,520 294,520
Capital Expenditures 1,472,600 147,260 73,630 14,726
Increases Net Work Capital 53,719 8,058 6,178
Free Cash Flow -1,472,600 60,266 209,467 293,181

Capital Expenditure Y0 Y1 Y2 Y3
0.10 Year 0 - 10% of PPE end of 2020 1,472,600
0.10 Year 1 - 10% 147,260
0.05 Year 2 - 5% 73,630
0.01 Year 3 - 1% 14,726
1,472,600 147,260 73,630 14,726

2b Answer line 26 - Depreciation by assuming IBM starigth-line method over 5 years

Depreciation Y0 Y1 Y2 Y3
Year 1-5 = Depreciate Year 0 over 5 yrs 1,472,600 294,520 294,520 294,520

Increases in Net Working Capital IBM Yr 2020 Y1 Y2 Y3

Net Receivables 18,738,000
Inventory 1,839,000
Accounts Payable 4,908,000
Net Working Capital 15,669,000
Sales 73,621,000
NWC /Sales 21.28% 53,719 61,777 67,955
Increase in NWC 53,719 8,058 6,178

12% 0 1 2
Free cash flow -1,472,600 60,266 209,467
Discount Factor 1.000000 0.892857 0.797194
PV - Free cash flow -1,472,600 53,809 166,986
NPV -664,510
IRR -16%
 5% 5% Data Case Case 1 Case 2
Summary
Y4 Y5 3% 2% 4%
1,955,742 2,053,529 NPV -559,840 -664,510 139,002
1,620,492 1,701,516 IRR -6% -16% 3%
17.14% 17.14%
335,250 352,013
294,520 294,520
40,730 57,493
8,553 12,073
32,177 45,419
294,520 294,520
14,726 14,726
3,398 3,568
308,573 321,646

Y4 Y5

14,726 14,726
14,726 14,726

Y4 Y5
294,520 294,520

Y4 Y5

71,352 74,920
3,398 3,568

3 4 5
293,181 308,573 321,646
0.711780 0.635518 0.567427
208,681 196,104 182,510
Question 4.a1 Case 2
IBM Yr 2020 4% 15% 10%
Items Y0 Y1 Y2 Y3
Revenue 73,621,000 2,944,840 3,386,566 3,725,223
Cost of Revenue 2,440,040 2,806,046 3,086,651
Profit Margin (EBITDA/Revenue) 17.14% 17.14% 17.14%
Project Profitability 504,800 580,520 638,572
Depreciation 294,520 294,520 294,520
EBIT 210,280 286,000 344,052
21% Income Tax Rate 44,159 60,060 72,251
Unlevered Net Income Free Cash Flow 166,121 225,940 271,801
Depreciation 294,520 294,520 294,520
Capital Expenditures 1,472,600 147,260 73,630 14,726
Increases Net Work Capital 107,438 16,116 12,355
Free Cash Flow -1,472,600 205,943 430,714 539,240

Capital Expenditure Y0 Y1 Y2 Y3
0.10 Year 0 - 10% of PPE end of 2020 1,472,600
0.10 Year 1 - 10% 147,260
0.05 Year 2 - 5% 73,630
0.01 Year 3 - 1% 14,726
1,472,600 147,260 73,630 14,726

2b Answer line 26 - Depreciation by assuming IBM starigth-line method over 5 years

Depreciation Y0 Y1 Y2 Y3
Year 1-5 = Depreciate Year 0 over 5 yrs 1,472,600 294,520 294,520 294,520

Increases in Net Working Capital IBM Yr 2020 Y1 Y2 Y3

Net Receivables 18,738,000
Inventory 1,839,000
Accounts Payable 4,908,000
Net Working Capital 15,669,000
Sales 73,621,000
NWC /Sales 21.28% 107,438 123,554 135,909
Increase in NWC 107,438 16,116 12,355

12% 0 1 2
Free cash flow -1,472,600 205,943 430,714
Discount Factor 1.000000 0.892857 0.797194
PV - Free cash flow -1,472,600 183,878 343,363
NPV 139,002
IRR 3%
 5% 5%
Y4 Y5
3,911,484 4,107,058
3,240,983 3,403,032
17.14% 17.14%
670,501 704,026
294,520 294,520
375,981 409,506
78,956 85,996
297,025 323,509
294,520 294,520
14,726 14,726
6,795 7,135
570,023 596,168

Y4 Y5

14,726 14,726
14,726 14,726

Y4 Y5
294,520 294,520

Y4 Y5

142,705 149,840
6,795 7,135

3 4 5
539,240 570,023 596,168
0.711780 0.635518 0.567427
383,820 362,260 338,282
Question 4.b

Case 1 10%

10% 0 1 2 3 4 5
Free cash flow -1,472,600 133,105 320,090 416,211 439,298 458,907
Discount Factor 1.000000 0.909091 0.826446 0.751315 0.683013 0.620921
PV - Free cash flow -1,472,600 121,004 264,538 312,705 300,047 284,945
NPV -479,242
IRR -4%

Case 2 15%

15% 0 1 2 3 4 5
Free cash flow -1,472,600 133,105 320,090 416,211 439,298 458,907
Discount Factor 1.000000 0.869565 0.756144 0.657516 0.571753 0.497177
PV - Free cash flow -1,472,600 115,743 242,034 273,665 251,170 228,158
NPV -653,878
IRR -8%
Question 4.c1
Case 1 - 0% revenue growth is constant after 1st year.
IBM Yr 2020 3% 0% 0%
Items Y0 Y1 Y2 Y3
Revenue 73,621,000 2,208,630 2,208,630 2,208,630
Cost of Revenue 1,830,030 1,830,030 1,830,030
Profit Margin (EBITDA/Revenue) 17.14% 17.14% 17.14%
Project Profitability 378,600 378,600 378,600
Depreciation 294,520 294,520 294,520
EBIT 84,080 84,080 84,080
21% Income Tax Rate 17,657 17,657 17,657
Unlevered Net Income Free Cash Flow 66,423 66,423 66,423
Depreciation 294,520 294,520 294,520
Capital Expenditures 1,472,600 147,260 73,630 14,726
Increases Net Work Capital 80,579 0 0
Free Cash Flow -1,472,600 133,105 287,313 346,217

Capital Expenditure Y0 Y1 Y2 Y3
0.10 Year 0 - 10% of PPE end of 2020 1,472,600
0.10 Year 1 - 10% 147,260
0.05 Year 2 - 5% 73,630
0.01 Year 3 - 1% 14,726
1,472,600 147,260 73,630 14,726

Depreciation Y0 Y1 Y2 Y3
Year 1-5 = Depreciate Year 0 over 5 yrs 1,472,600 294,520 294,520 294,520

Increases in Net Working Capital IBM Yr 2020 Y1 Y2 Y3

Net Receivables 18,738,000
Inventory 1,839,000
Accounts Payable 4,908,000
Net Working Capital 15,669,000
Sales 73,621,000
NWC /Sales 21.28% 80,579 80,579 80,579
Increase in NWC 80,579 0 0

12% 0 1 2
Free cash flow -1,472,600 133,105 287,313
Discount Factor 1.000000 0.892857 0.797194
PV - Free cash f -1,472,600 118,843 229,044
NPV -461,802
IRR -11%
 0% 0%
Y4 Y5
2,208,630 2,208,630
1,830,030 1,830,030
17.14% 17.14%
378,600 378,600
294,520 294,520
84,080 84,080
17,657 17,657
66,423 66,423
294,520 294,520
14,726 14,726
0 0
346,217 346,217

Y4 Y5

14,726 14,726
14,726 14,726

Y4 Y5
294,520 294,520

Y4 Y5

80,579 80,579
0 0

3 4 5
346,217 346,217 346,217
0.711780 0.635518 0.567427
246,431 220,027 196,453
Question 4.c2
Case 2 - 10% revenue growth is constant after 1st year.
IBM Yr 2020 3% 10% 10%
Items 0 1 2 3
Revenue 73,621,000 2,208,630 2,429,493 2,672,442
Cost of Revenue 1,830,030 2,013,033 2,214,336
Profit Margin (EBITDA/Revenue) 17.14% 17.14% 17.14%
Project Profitability 378,600 416,460 458,106
Depreciation 294,520 294,520 294,520
EBIT 84,080 121,940 163,586
21% Income Tax Rate 17,657 25,607 34,353
Unlevered Net Income Free Cash Flow 66,423 96,333 129,233
Depreciation 294,520 294,520 294,520
Capital Expenditures 1,472,600 147,260 73,630 14,726
Increases Net Work Capital 80,579 8,058 8,864
Free Cash Flow -1,472,600 133,105 309,165 400,163

Capital Expenditure 0 1 2 3
0.10 Year 0 - 10% of PPE end of 2020 1,472,600
0.10 Year 1 - 10% 147,260
0.05 Year 2 - 5% 73,630
0.01 Year 3 - 1% 14,726
1,472,600 147,260 73,630 14,726

2b Answer line 26 - Depreciation by assuming IBM starigth-line method over 5 years

Depreciation 0 1 2 3
Year 1-5 = Depreciate Year 0 over 5 yrs 1,472,600 294,520 294,520 294,520

Increases in Net Working Capital IBM Yr 2020 1 2 3

Net Receivables 18,738,000
Inventory 1,839,000
Accounts Payable 4,908,000
Net Working Capital 15,669,000
Sales 73,621,000
NWC /Sales 21.28% 80,579 88,637 97,500
Increase in NWC 80,579 8,058 8,864

12% 0 1 2
Free cash flow -1,472,600 133,105 309,165
Discount Factor 1.000000 0.892857 0.797194
PV - Free cash f -1,472,600 118,843 246,464
NPV -276,585
IRR -6%
 10% 10%
4 5
2,939,687 3,233,655
2,435,770 2,679,347
17.14% 17.14%
503,917 554,308
294,520 294,520
209,397 259,788
43,973 54,556
165,423 205,233
294,520 294,520
14,726 14,726
9,750 10,725
435,467 474,302

4 5

14,726 14,726
14,726 14,726

4 5
294,520 294,520

4 5

107,250 117,975
9,750 10,725

3 4 5
400,163 435,467 474,302
0.711780 0.635518 0.567427
284,828 276,747 269,132