Dell Computers Harvard Case Solution & Analysis

This case is based upon the calculation of Dell’s Net present value and free cash flows. The cash flows have been calculated for the based on the time period of five years. The amount of initial expenditure has been calculated by multiplying the value of property, plant and equipment by 10% at the start of the project. The value related to the property, plant and equipment has been used from 2012 financial statements.

Furthermore, the additional expenditure has been increased by 10% that has been applied to the initial expenditure. Moreover, there is a growth of almost 5.00% and then in the rest of the year, the growth rate is 1%. Despite this, the total revenue from the fiscal year 2012 has been applied at a percentage of 3.00% and in the second year then there is a growth of almost 15.00%.

In third year, the revenue increased by 10%. Moreover, in the fourth and fifth year, the growth remained the same at 5%. In monetary terms, the figure related to the value of revenues in 2012 is $1862 and in the fifth year, the revenues are $2597. Hence, this showed a trend. In addition to this, the depreciation in the fiscal year 2012 is calculated by dividing the value of property, plant and equipment, i.e. $2100 by five years which is the project’s life.

As a result, the unlevered net income in the first year is $1186 and in the fifth year, the value is $2420. The depreciation has been then added back to the unlevered net income. Hence, in the fiscal year 2012, the value of depreciation is $420 and in the fifth year, it is equal to $533 million, respectively.Moreover, the capital expenditure has been calculated by deducting the value of depreciation from property plant and equipment.

In addition to this, as per the exhibits, the value of capital expenditure in 2012 is $0 and in the fiscal year 2016 the value has increased to $22.49. The net working capital has also been included in the calculations based upon net present value and the free cash flows. The value related to the net working capital in the first year is $7,000 and in fifth year, it is equal to $9450.

Apart from that, the value regarding the pre-tax cash flows has also been calculated based on the period of five years. The income tax rate of 17% has been used that is taken from the website, also the income tax rate of 17% is applied to the value of pre-tax cash flows in order to get a value of free cash flows, which will provide essential in calculating the net present value related to this five year project. The terminal value is then calculated by dividing the figure of the weighted average cost of capital, which is almost 2.13% as per the exhibits.

Moreover, the value related to the free cash flows is $5595 in 2012 and $11969 in the fifth year of this project. Apart from that, the net present value that has been obtained after making the above adjustments is $738,419. On the other hand, the market value of equity is 18% and the market value of debt is 82%. The market value of equity has been calculated by dividing the total stockholders’ equity of the fiscal year 2012 by total liabilities and stockholder’s equity.

The percentages related to the value of risk free rate and the market risk premium are taken from the website in order to calculate the weighted average cost of capital. The risk free rate is 2.23% and the market risk premium is 7.50%and Dell’s equity beta is equal to 0. The resulting cost of equity is 2.23% and the cost of debt after incorporating the value of tax is 2.68%. Hence, the weighted average cost of capital is 2.60%. The growth rate that has been used in order to calculate the terminal value is taken to be 1.00% approximately.Dell Computers Case Solution

The statement of financial position, income statements and statement of cash flows have been also incorporated into the exhibits that relate to the last four years. Apart from that, the proposed new project that is related to the type of a tablet computer is similar to the size of an iPad however, it is has higher operating power as compared to the high end desktop system, respectively. Hence, this project that has a life of 5 years should be accepted due to the positive figure based upon the net present value..........

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