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The company iCalculate is a large-scale company manufacturing personal computers, desktops and printers for businesses and households in the state of Victoria, Australia. After extensive research and development, iCalculate has recently developed a new laptop, the iCal2021, and must decide whether to make the investment to produce. The laptop would be ideal for businesses and individuals doing a large amount of number crunching, in addition to normal usage. The research and development costs so far have totalled $60 million. The iCal 2021 would be put on the market at the beginning of 2022 (Year 1), and iCalculate expects it to stay on the market for a total of six years (from Year 1 to Year 6). The company has spent $10 million on marketing and the results showed that there is a significant market for the iCal2021 laptop. However, the demand for this laptop may change due to the competitiveness of the personal computer market and macroeconomic conditions in future. Page 3 of 8 As the Chief Financial Officer at iCalculate, Alicia Brown, has been asked by the board of directors to evaluate the iCal2021 project and provide a recommendation on whether to go ahead with the investment. She was concerned with the discount rates used in the analysis, as well as various comments that she received from other executives at iCalculate, whom she had asked to review the proposal. Ms. Brown assumes that the initial investment will occur immediately (Year O), and operational cash flows will occur at the beginning of 2022 (Year 1). Calculate must initially invest $120 million in production equipment in Year 0. This equipment can be sold for $50 million at the end of six years (Year 6). Calculate intends to sell the iCal2021 to big businesses and individuals. The new laptop, iCal2021, is expected to sell for $2100 per unit. The variable cost is 25% of sales. The general administration cost of the project is $25 million annually. The production equipment would be depreciated using the straight-line depreciation method over 6 years to a zero balance. The immediate initial working capital requirement is $10 million in Year 0. Thereafter, the net working capital requirements will be 10% of sales. At the end of year 6, iCalculate will recover all working capital. The company iCalculate used a 10% per annum discount rate to evaluate a new project. The company tax rate is 30% Ms. Brown has hired you as a financial consultant for Calculate. You are expected to answer the following questions and resolve any of her concerns. She requires you to prepare a capital budgeting analysis based on the following scenarios to show the directors in a meeting to be held soon. Based on the case study, please answer all of the following questions in your report. Scenario 1: Constant demand 1. Using the financial and qualitative information provided in the case, estimate the free cash flow of this project in each year (from Year Oto Year 6) if the demand in the market is to produce 35,000 laptop per year. Please show all your working. 2. Ms. Brown had been told that there are various techniques for valuation such as NPV, ARR, payback period, and discounted payback period, IRR, and Pl, which could be used for this project. She wants you to use all these techniques and help iCalculate make this investment decision. iCalculate requires that the payback period is less than 3 years and discounted payback period is less than 4 years. Target ARR for Calculate is 30%. What can you conclude from your analysis? Based on your analysis should iCalculate accent this project 2 Show all your workings

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