1. GIVEN THE UNIT SALES INFORMATION IN Exhibit 1, develop an annual revenue forecast for 2004 through 2009. Forecast sales first assuming that the revised Bernoulli will be introduced 1 year from today, and then create a forecast which is based on sales of the current model, assuming that Working declines to invest more capital in Bernoulli.

2. Use the cost information Jennifer has assembled to construct a forecast of COGS and operating expenses for 2004-2009. Assume that the Bernoulli will be introduced, with its new cost structure, 1 year from now, and then calculate a cost forecast assuming that the $18 million is not provided for development of the new product.

3. Using the information developed for Qns 1 and 2, develop a discounted cash flow analysis for the Bernoulli division for 2004-2009. Working's board has asked of net present value, profitability and internal rate of return when making decisions in the past. Complete your analysis assuming that the additional investment is contributed today. Be sure to recognise a terminal value for the division at the end of 2009.

4. Jennifer expects to be asked about selling the Bernoulli division. What price should Working ask for it if it sells Bernoulli today, immediately after making the requested investment? What price could it expect to receive if it plans to leave Bernoulli alone?

WORKING COMPUTERS, INC (adapted from a case in Stretcher and Michael,

(2005) Cases in Financial Management, pearson/Prentice Hall, New

Jersey.)

jennifer sobey-analyst in the headquarters of Working Computers

,has been asked to evaluate whether or not Working should sell a

division of the firm which has been losing market share and requires a

great deal of new investment to remain competitive.

The ailing product- a personal data appliance (PDA) - the Bernoulli

device.

Jennifer thought that Bernoulliâs declining share was troublesome. In

2003,, Bernoulli unit sales has represented approximately 15% of the

market, with the largest competitor grabbing a full 42% of unit sales.

Unfortunately, market share had been declining at least 1% each quarter,

and there was fear that it would drop even more.

The folks in the Bernoulli labs were currently working on major upgrades

to the device and its interface softwares. To continue this research,

Bernoulli division estimated that it would need at least $18 million in

the next month in order to finish the development of the more advanced

product. When the new products become available in late 2004, it was

likely that Bernoulli could regain as much as 8% of the market within

the 1st year, with gains of 4% per year after that.

Exhibit 1.

Working Computers

Unit Sales Projections

Periods ending 31st December 2003 through 31st December 2009

(units, in thousands)

31/12/03 31/12/04 31/12/05 31/12/06 31/12/07 31/12/08 31/12/09

Units sold,

With new investment 180,000 150,000 189,000 246,000 264,000 264,000

264,000

Units sold,

Without new investment 180,000 150,000 102,000 57,000 48,000 48,000

48,000

Currently, the Bernoulli division operated with cost of goods sold

(COGS) of approximately 60% of the unit price and operating expenses

(excluding depreciation) averaging 24% of total revenues. The division

expected to sell a total of 300,000 units by the end of 2003 at a price

of $495 each. The model expected to ship beginning in late 2004 would

sell at the same price point. The divisionâs managers estimated,

though, that the revised Bernoulli would have COGS of 54%of the retail

price with higher operating expenses of 26% due to increased

advertising. Given the competitive nature of the industry, these price

point and cost estimates are expected to remain the same for the next

several years.

For strategic planning purposes, Workingâs management allocated

depreciation to the existing Bernoulli division as though the entire

division was an asset and depreciated it using the straight line method

over 10 years, with 5years of operation behind it. The initial

investment of $56 million had been made in early 1999. the new funds

allocated to the division would be treated similarly, except that

management had decided that any new investment would be depreciated

using the straight line method over 5 years; due to changes in the

industry since 1999, this was expected to be more consistent with the

nature of the market for computing devices and PDAs. Workingâs

managers used a weighted average cost of capital, or hurdle rate, of

14.5% when evaluating capital budgeting projects, and Jennifer felt that

this would be an appropriate discount rate in this instance as well. The

firmâs marginal tax rate, for planning purposes, was 34%.

Finally, Jennifer had to consider the fact that the company always held

the option to sell the Bernoulli division to an existing competitor. In

developing her analysis, Jennifer would have come up with an estimate of

a price for the decision, based on the sales and market share

expectations she had gathered. To establish a terminal value in the

final forecast year, 2009, she would capitalise the cash flows in that

year by dividing them by Workingâs overall cost of capital,

essentially treating that yearâs cash flow as the payment from

perpetuity. In the event that management declined to invest the

requested $18 million today, the Bernoulli division could still maintain

some level of sales for several years, and the patents held by the

division would be worth selling or licensing as well.

REQUIRED

GIVEN THE UNIT SALES INFORMATION IN Exhibit 1, develop an annual revenue

forecast for 2004 through 2009. Forecast sales first assuming that the

revised Bernoulli will be introduced 1 year from today, and then create

a forecast which is based on sales of the current model, assuming that

Working declines to invest more capital in Bernoulli.

Use the cost information Jennifer has assembled to construct a forecast

of COGS and operating expenses for 2004-2009. Assume that the Bernoulli

will be introduced, with its new cost structure, 1 year from now, and

then calculate a cost forecast assuming that the $18 million is not

provided for development of the new product.

Using the information developed for Qns 1 and 2, develop a discounted

cash flow analysis for the Bernoulli division for 2004-2009. Workingâs

board has asked of net present value, profitability and internal rate of

return when making decisions in the past. Complete your analysis

assuming that the additional investment is contributed today. Be sure to

recognise a terminal value for the division at the end of 2009.

Jennifer expects to be asked about selling the Bernoulli division. What

price should Working ask for it if it sells Bernoulli today, immediately

after making the requested investment? What price could it expect to

receive if it plans to leave Bernoulli alone?

Please show all workings. Note some workings may appropriately be placed

in appendices. Detailed and careful analysis and discussion of any

issues involved should be included, supported by references.

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