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Over the last two years, A company has already spent $150 million on R&D to optimize the design of the new smartphone. If the company would decide to actually go ahead with the project, the development and production of the new phone will initially require an investment equal to 42% of the companys current net property, plant and equipment (PPE), as per the fiscal year ended 31 October 2020. First-year revenue for the new product is expected to be 3.6% of total revenue for HPs fiscal year ended 31 October 2020. The phones revenue is expected to grow at 75% for the second year, then 20% for the third, and after that decline by 5% annually for the final two years of the expected life of the product. Your team will have to determine the rest of the cash flows associated with this project. Your boss has indicated that the operating costs of this project will be similar to the rest of the companys products. After the end of the first year the net working capital will have to be adjusted for this project. After that, networking capital will remain at the same level until the end of the project, when the NWC will be re-adjusted to its original values before the start of the project. Your boss has suggested that the increase in accounts payable related to this project, at the end of the first year, will be similar to the rest of the companys products. However, the inventory requirements and account receivable requirements are expected to be 35% higher compared to the companys other products. Your boss did not say anything about the depreciation of the PPE investments, so your team will have to decide on how the company will depreciate the PPE investments for this project

You are now ready to determine the free cash flow. Compute the free cash flow for each year. Set up the timeline and computation of the free cash flow in separate columns for each year of the project life. Be sure to make outflows negative and inflows positive. a. To estimate the annual operating costs of the project, assume, as your boss indicated, that the projects profitability, the ratio of Revenue / Costs (Costs may also be labeled as Costs of Revenue) will be similar to HPs existing projects in 2020. b. Determine HPs tax rate by dividing its income taxes by its income before tax in 2020. c. Determine the change in networking capital attributable to the project by considering the level of inventory, accounts receivable, and accounts payable as a percentage of revenues. For example, use HPs 2020 Inventory / Revenues to estimate the required percentages. (Use only accounts receivable, accounts payable, and inventory to measure working capital. Other components of current assets and liabilities are harder to interpret and are not necessarily reflective of the project's required net working capital e.g. HPs cash holdings).

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