Apple Inc. has just developed a new budget iPhone, named iPhone C. The budget phone will contain a 1.5GHz processor, 4.7’ display with 312 pixel per-inch display, 8-megapixel rear facing camera and a 2000 mAh battery. Total component costs equate to $133.00. Labour hours for this phone come to 8 per unit at a price of $4.50 per hour. This budget phone is intended to help the tech company expand further into emerging market.
iPhone C, while expected to expand market share, is also likely to cannibalize margins on its high-end smartphones which are currently at 80% based on component and labour costs of $241.00 (iPhone C margins are expected to be half of iPhone 5s’). Cannibalization is expected to be static for 2 years, after which, iPhone 6 will be released and sales are expected to rebound.
The iPhone C will be introduced to the markets with region and language specific marketing & PR campaigns. Additionally, customer support will require training to deal with inquiries for the new product. Given Apple’s global marketing budget of $1b annually, 41% of which is for the phone division, 50% of which will be allocated to regional iPhone C marketing budgets and distributed based on where market penetration is expected to be greatest based on budget handset sales
Application of advanced accounting techniques allows for the avoidance of much corporate tax, and thus taxes are only due based on regional profits. Patenting the new technology in each region will cost a one-time fee $3bn which will be allocated in the same percentage as expected 1st year sales of the budget phone and expenses fully in the year incurred. Funds for this cost will be fully raised through an ‘interest only’ bond issue at a very generous 10%. The bond will be repaid in full at maturity in 3 years.
Approval to sell the budget iPhone in each of the regional markets requires a one-time application to each regional communication agencies at a total cost of $2bn, which also is to be to be allocated regionally in the same percentage as patent costs. Assuming approval is granted, sales of the budget phone are expected to grow at rates stated in the Table below. ( pls see attached file)
Notes:
• Apple’s app annual revenue is $150 per user (assume one user owns 1 handset), 30% of which Apple retains.
• Upgraded factory equipment costs will be nearly $2bn, for which Apple is responsible for and intends to depreciate equally over all regions over its 3 year life. The equipment is expected to have a salvage value of $250mn.
• Logistic costs related to iPhone 5 can be ignored.
• Depreciation is done via the straight line method.
• Assume a tax rate of 30% & a required after-tax required rate of return is 7%
INSTRUCTIONS:
1. Determine in which region the iPhone C is expected to be the best performer using NPV analysis technique.
2. Include a Profit/Loss Statement and cash flow statement
iPhone C, while expected to expand market share, is also likely to cannibalize margins on its high-end smartphones which are currently at 80% based on component and labour costs of $241.00 (iPhone C margins are expected to be half of iPhone 5s’). Cannibalization is expected to be static for 2 years, after which, iPhone 6 will be released and sales are expected to rebound.
The iPhone C will be introduced to the markets with region and language specific marketing & PR campaigns. Additionally, customer support will require training to deal with inquiries for the new product. Given Apple’s global marketing budget of $1b annually, 41% of which is for the phone division, 50% of which will be allocated to regional iPhone C marketing budgets and distributed based on where market penetration is expected to be greatest based on budget handset sales
Application of advanced accounting techniques allows for the avoidance of much corporate tax, and thus taxes are only due based on regional profits. Patenting the new technology in each region will cost a one-time fee $3bn which will be allocated in the same percentage as expected 1st year sales of the budget phone and expenses fully in the year incurred. Funds for this cost will be fully raised through an ‘interest only’ bond issue at a very generous 10%. The bond will be repaid in full at maturity in 3 years.
Approval to sell the budget iPhone in each of the regional markets requires a one-time application to each regional communication agencies at a total cost of $2bn, which also is to be to be allocated regionally in the same percentage as patent costs. Assuming approval is granted, sales of the budget phone are expected to grow at rates stated in the Table below. ( pls see attached file)
Notes:
• Apple’s app annual revenue is $150 per user (assume one user owns 1 handset), 30% of which Apple retains.
• Upgraded factory equipment costs will be nearly $2bn, for which Apple is responsible for and intends to depreciate equally over all regions over its 3 year life. The equipment is expected to have a salvage value of $250mn.
• Logistic costs related to iPhone 5 can be ignored.
• Depreciation is done via the straight line method.
• Assume a tax rate of 30% & a required after-tax required rate of return is 7%
INSTRUCTIONS:
1. Determine in which region the iPhone C is expected to be the best performer using NPV analysis technique.
2. Include a Profit/Loss Statement and cash flow statement
