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The full detail of the question has been attached, please show me the answer step by step, thanks. 1. Given the unit sales information in Exhibit 1,

The full detail of the question has been attached, please show me the answer step by step, thanks.
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 one 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 cost of goods sold and operating expenses for 2004 through 2009. Assume first that the Bernoulli will be introduced, with its new cost structure, one 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 Questions 1 and 2, develop a discounted cash flow analysis for the Bernoulli division for 2004 through 2009. Working's board has asked for net present value, profitability and the 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. Make a recommendation as to whether or not Working Computers should contribute the requested $18 million to the Bernoulli. Be sure to recognise/discuss all aspects of the decision, including the potential impact that the requested ongoing investment dollars could have on the plans of Stewart Workman.
5. Jennifer expects Stewart Workman to ask about selling the Bernoulli division. What price should Working ask for 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?
6. In addition to the issues in Question 1 through 5, what other considerations might be appropriate when a firm is considering eliminating a product line or divesting a division?

WORKING COMPUTERS, INC.
Jennifer Sobey, an 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 is a personal
data appliance, or PDA, that once led the market in features and
innovation, only to fall prey to competition from numerous firms once it
had paved the way for the product category. Complicating Jennifer’s
analysis and recommendation are several political issues involving the
wayward division. In particular, Working’s recently returned CEO,
Stewart Workman, has decided that the product (the Bernoulli device) is
a “loser” and has plans to use the capital currently committed to
Bernoulli to boost the ailing performance of other parts of the firm.
.
JUST THE FACTS
Jennifer had discretely gathered a great deal of information from the
Bernoulli unit as well as several of its competitors. In addition, she
had spent the greater part of a week downloading information from the
Internet, mainly opinions of the PDA market and the strengths and
weaknesses of Bernoulli as an ongoing platform.
Jennifer thought that Bernoulli’s declining market share was
troublesome. In 2003, Bernoulli unit sales had represented approximately
fifteen percent of the market, with the largest competitor grabbing a
full 42 percent of unit sales. Unfortunately, market share had been
declining at least one percent each quarter, and there was fear that it
would drop even more. This drop was likely due to a large competitor’s
recent announcement that compatibility with its platform, and not the
Bernoulli, would be incorporated into a popular line of office software
that was unavailable for Working Computers.
The folks in the Bernoulli labs were currently working on major upgrades
to the Bernoulli device as well as the Bernoulli interface software;
these improvements would make Bernoulli compatible with almost every
personal computer on the market. To continue this research, the
Bernoulli division estimated that it would need no less than $18 million
in the next month in order to finish the development of the more advance
product. Allocating this investment within the division was the
responsibility of the division’s operating officer, and Jennifer was
confident that the money would be put to good use. When the new products
became available in late 2004, it was likely that Bernoulli could regain
as much as 8 percent of the market within the first year, with gains of
four percent per year after that. Nonetheless, in recent meetings,
Stewart Workman had criticised the $18 million request as being
“insane,” stating that he knew of several places in the company
where those funds could “earn at least our normal cost of capital for
the shareholders.” The firm had enough cash available for this type of
investment, but Jennifer reasoned that Workman was taking the allocation
of that money personally. Jennifer had forecasted unit sales for the
periods 2004 through 2009 (Exhibit 1), and she had calculated demand
both with and without the additional market share that the new product
was expected to generate.
Exhibit 1.
Working Computers
Unit Sales Projections
Periods ending December 31, 2003 through December 21, 2009
(units, in thousands)
  12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09
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 a cost of goods sold of
approximately sixty percent of the unit price and operating expenses
(excluding depreciation) averaging 24 percent 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 cost of goods sold of 54
percent of the retail price with higher operating expenses of 26 percent
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 five years 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 percent 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
percent.
Finally, Jennifer had to consider the fact that the company always held
the option to sell the Bernoulli division to an existing competitor. In
fact, there were rumours on the Internet that several quiet and
unofficial offers had already been discussed with the members of the
board of directors. In developing her analysis, Jennifer would have to
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 a 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.
For her previous presentations to senior management, Jennifer had
produced detailed discounted cast flow analyses accompanied by documents
to support her assumptions. In addition, she usually spent some time
developing sensitivity analyses using any number that she expected to be
questioned by the board. This time, her main fear was that her
understanding of the growth in market share, because of the revised
Bernoulli due in late 2004, would turn out to be optimistic.
After reviewing her notes, Jennifer grabbed her gym bag and headed off
to the fitness centre in the next building. She anticipated having a
long night ahead of her, and a jog and a shower was just the thing to
clear her head and help her focus. Once in the lobby of her building,
she passed under several hanging banners promoting the company’s
newest products, bearing slogans such as “Imagine Working” and
“We’re Working for You.” Another read “We’re Always Working”
in the corporation’s trademarked font. Reading this banner, Jennifer
slowed and said to herself, “Isn’t that the truth.”
REQUIRED
Answer the questions below, showing all workings. Note that some
workings may appropriately be placed in appendices. Detailed and careful
analysis and discussion of any issues involved should be included,
supported by references.
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 one 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 cost of goods sold and operating expenses for 2004 through
2009. Assume first that the Bernoulli will be introduced, with its new
cost structure, one 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 Questions 1 and 2, develop a
discounted cash flow analysis for the Bernoulli division for 2004
through 2009. Working’s board has asked for net present value,
profitability and the 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. Make a recommendation as to whether or not Working Computers should
contribute the requested $18 million to the Bernoulli. Be sure to
recognise/discuss all aspects of the decision, including the potential
impact that the requested ongoing investment dollars could have on the
plans of Stewart Workman.
5. Jennifer expects Stewart Workman to ask about selling the Bernoulli
division. What price should Working ask for 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?
6. In addition to the issues in Question 1 through 5, what other
considerations might be appropriate when a firm is considering
eliminating a product line or divesting a division?

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