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GIVEN THE UNIT SALES INFORMATION IN Exhibit 1, develop an annual revenue forecast for 2004 through 2009.

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 Bernoulli’s 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 division’s 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, Working’s 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. Working’s
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
firm’s 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 Working’s overall cost of capital,
essentially treating that year’s 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. 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.
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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