Group CASE_AppleITVcase

Group CASE_AppleITVcase - An Investment Analysis Case Study...

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1 An Investment Analysis Case Study This case is a group project that is due on March 21, before class at 10.30 . Format : Each group will turn in one report (sounds obvious, but might as well make it explicit). Each report should have a cover page that contains the following – the names of the group members in alphabetical order and the following summary information on the analysis: Decision on Investment: Invest or Don’t invest Cost of capital: % value Return on capital: % value NPV – 10-year life: $ value NPV- Longer life: $ value
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2 The Apple iTV Project Apple Computer has had a very good run, both in terms of accounting profits and stock prices. Based largely on the success of the iPod, the company has reported double digit growth in revenues and earnings over the last four years (see exhibit 1) and its stock price has reflected this success (see exhibit 2). It has a substantial cash balance and a strong balance sheet (see exhibit 3 for balance sheet information). However. Steve Jobs, CEO of Apple, is concerned that the halcyon days of the iPod are past and that potential challengers loom on the horizon (Sony, Zune etc.). Apple is considering entering the television market with an innovatively designed and technologically state-of-the art LCD television, called the iTV, aimed at the upper end of the market. You have been asked to collect the data to make the assessment and have come back with the following information: 1. : Apple has already spent (and expensed) $ 200 million on research on the television technology and development of the commercial design. None of that money can be recouped at this stage, if Apple decides not to go ahead with the iTV. 2. Introductory Costs ; If Apple decides to go ahead with the iTV, it will have to spend $ $ 2 billion up front (right now) to tie up suppliers, distributors and retailers and as investment in infrastructure. The cost is depreciable over 10 years down to a salvage value of $ 200 million, and Apple expects to use straight-line depreciation. 3. Market Potential and Share : There were 30 million televisions sold in the United States in the most recent year and the market is expected to grow approximately 4% a year in the long term. Apple expects to gain a 2.5% market share next year if the iTV is introduced and increase that market share by 0.5% a year (3% in the second year, 3.5% in the third year etc.) to reach a target market share of 5% of the overall market by the sixth year. It expects to maintain that market share beyond year 6. 4. Pricing and Unit Costs : Apple expects to price its displays at $ 1,000 a unit next year and the price will keep pace with inflation after that. Based upon the costs of the material used in the iTV currently, Apple expects the production cost per unit to be $ 400 next year and grow at the inflation rate thereafter. 5.
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Group CASE_AppleITVcase - An Investment Analysis Case Study...

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