apple project investment feasability

8/11/2019 Apple Project Investment Feasability

1/23

!""#$ &

I3Project InvestmentFeasibility Study

3/2/10Apple, Inc.


2/23

!""#$ '

Introduction

The iCube is the latest innovation from Apple, Incorporateds newly formed net-book

research and development division. Consumer trends continue to shift towards affordable

alternatives to general laptops and desktop PCs. The release of the iPhone has revealed

numerous opportunities to capture market share in the rapidly evolving net-book market. I-

Phone users attitudes and perceptions have adapted to utilizing online information sharing

networks created by Google, Pando, Yahoo, etc., creating a conduit to store word processing

documents, spreadsheets, PDFs, and presentation software. The iCube optimizes the web

experience by performing full integration into standard applications, intragrating calendars and

documents, and connects the user on a globalized communication network. The following pages

include project analyses performed at macro and internal impact levels for determining project

feasibility.

Project Feasibility Team:

Jim Sirokman, Project Manager, (WACC, Capital Structure)

Jim JR Ragaisis, (CAPM & YTM)

Elizabeth Tisor, (SWOT, Annual Plan, and Forecast)

Jessica Van Voorst, (NPV modeling and analysis)

William Gregg Davidson, (SLRP, Checks and Balances)

Drew Vyn, (Ratio Analysis)

Felix Haufe, (Pricing Structure, Terms and Conditions)


3/23

!""#$ (

Apple Inc. Ratio Analysis

Apple Inc. and its wholly-owned subsidiaries (collectively Apple or the Company)

design, manufacture, and market personal computers, mobile communication devices, and

portable digital music and video players and sell a variety of related software, services,

peripherals, and networking solutions.

The Apple Corporation is dedicated to providing the best possible financial outcome for

its shareholders. Apple has established itself as the premier consumer electronics corporation.

Much of Apples success is due to its canny ability to develop new revolutionary products that are

designed to make the consumers everyday life easier.

Below are some of the ratios we analyzed to uncover Apples true financial status in

comparison to their competitors.

Apple Microsoft Dell HP

2009 2009 2009 2009

Price/Earnings Ratio: 31.37 18.7 20.7 15.9

Return on Assets: 11.35% 16.90% 4.70% 6.60%

Return on Invested Capital: 17.68% 30.60% 17.10% 13.20%

Return on Shareholders' Equity: 20.49% 35.00% 49.00% 13.00%

Gross Margin %: 35.96% 83.10% 19.20% 26.20%

Profit Margin: 15.61% 28.00% 5.10% 6.20%

Earnings Per Share: $6.42 $1.54 $0.74 $3.32

Current Ratio: 1.88 1.8 1.5 1.2Quick Ratio: 1.47 1.6 1.2 0.7

Inventory Turnover: 47.08 6.8 40.3 12.4

Asset Turnover: 0.78 0.8 1.7 1.1

Debt-to-Equity Ratio: 93.49% 98.03% 517.41% 55.09%

Debt-to-Capitalization Ratio: 19.49% 22.02% 64.52% 30.47%

Cash Flow to Debt Ratio: 39.04% 39.04% 7.28% 60.69%

Activity Ratios

P/E Ratio-

A valuation ratio of a company's current share price compared to its per-share earnings. Apples

has a very strong P/E ratio relative to its competitors (Microsoft-18.7, Dell-20.7, HP-15.9, Apple

31.37).

Return on Assets-

This percentage is a measure of profit per dollar of assets. The Apple company shows an 11.35%


4/23

!""#$ )

return on assets which is very strong but not as strong as Microsoft who has a 16.90%.

Return on Shareholders Equity-

This is the measure of how the stockholders faired during the year. Since creating shareholder

value is our major goal, this is an extremely important ratio. Apple has a very strong ROE for

2009 with 20.49% but its competitors created much higher value for their shareholders.

Microsoft had a 35.00% ROE and Dell recorded a major 49.00%.

Profitability Measures

Gross Margin Percentage-

The gross margin represents the percent of total sales revenue that the company retains after

incurring the direct costs associated with producing the goods and services sold by a company. In

the case of Apple, its gross margin percentage is 35% meaning that out of every dollar Apple

spends they retain .35 cents on the dollar.

Profit Margin-

Many companies pay a great deal of attention to their profit margin because it shows how much

profit a company is receiving on every dollar in sales. Apple shows a 15.61% profit margin for

2009. Microsoft, on the other hand, shows a massive 28.00% profit margin.

Earnings Per Share-

The portion of a company's profit allocated to each outstanding share of common stock. In this

area Apple is the leader with $6.42. Compared to Microsoft ($1.54), Dell ($0.74) and HP ($3.32)

it is easy to see that Apple is very concerned with increasing their shareholder value.

Liquidity Ratios

Current Ratio-

This is one of the best-known and widely used ratios. It simply measures a companys current

assets to current liabilities. Apple has a good current ratio at 1.88. This means that they have

almost twice as much assets as they do liabilities. Microsoft is at 1.8, Dell- 1.5 and HP-1.2.


5/23

!""#$ *

Quick Ratio-

Another widely used ratio that measures liquidity within a company. The quick ratio or Acid

Test Ratio compares a companys assets to its liabilities minus inventory. Inventory is taken out

because it tends to be the least liquid of assets (if you could sell it then it wouldnt be inventory).

After running the Quick ratio on Apple we see that they drop to second among their major

competitors with 1.47 (Microsoft-1.6).

Asset Turnover-

This liquidity ratio measures the amount of sales generated for every dollar of assets. This ratio

measures a firms efficiency in using its assets to generate sales or revenue (the higher the number

the better) The Apple company reports that for every dollar of assets they generate .78 cents.

This ranks them last among major competitors.

Leverage Ratios

Debt-to-Equity Ratio-

This leverage ratio indicates what proportion of equity and debt the company is using to finance

its assets. If this ratio is over 1, it means that the company is financing its assets with mostly

debt.

Debt to Capitalization Ratio-

A measurement of a company's financial leverage, calculated as the company's debt divided by

its total capital. The higher the debt-to-capital ratio, the more debt the company has compared to

its equity. Apple seams to be in a very good position at their Debt to Capital Ratio is 19.49%

compared to Microsoft-22.02%, Dell-64.52% and HP-30.47%.

Cash Flow to Debt Ratio-

This ratio compares a companys operating cash flow to its total debt. The higher the percentage

ratio the more likely a company is to carry its total debt. Apple is tied with its top competitor

Microsoft in this category at 39.04%. HP has the highest percentage with 60.69.


6/23

!""#$ +

Below are some of the ratios we analyzed to uncover Apples true financial status. These ratios

were then used to project 3 years into the future to account for the launch of our new product- the

new Apple netbook.

2009 2010 2011 2012

Return on Assets: 11.35% 11.46% 13.73% 16.63%

Return on Invested Capital: 17.68% 16.49% 17.25% 18.20%

Return on Shareholders' Equity: 20.49% 19.82% 20.04% 20.52%

Gross Margin %: 35.96% 38.60% 39.82% 40.86%

Profit Margin: 15.61% 16.31% 18.08% 20.53%

Current Ratio: 1.88 2.28 2.80 3.44

Quick Ratio: 1.47 2.25 2.33 2.38

Inventory Turnover: 47.08 55.17 58.21 61.31

Asset Turnover: 0.78 71.81% 70.97% 70.40%

Debt-to-Equity Ratio: 93.49% 83.52% 66.24% 52.26%

Debt-to-Capitalization Ratio: 19.49% 21.69% 17.89% 14.57%

Cash Flow to Debt Ratio: 39.04% 27.25% 35.03% 42.73%

After analyzing all the ratios from 2009 and projecting them out over 3 years, we were

able to determine the impact of our project on the company. The results were extremely

favorable as we were able to increase our shareholder value. In terms of liquidity, we were able

to increase our companys ability to cover our short-term debt two fold. We did this by

increasing our current assets by a greater margin than we increased our current liabilities. In

terms of leverage, our team was able to decrease our long-term debt by issuing bonds to finance

our project. Overall, our group was able to successfully mitigate for risk and produce a product

that will generate revenue and increase our shareholder value.

Cash Flow Models

,$ -./$ 0$/$#1"$0 .2 345 610$# 7.8$0 9"12 . 2$: ";109 ?2


7/23

!""#$ P

?;;$#$/.2= *QQ>QQQ

o R2&[T>*Q(

?\\M *)C(*S

4.G7.


8/23

!""#$ [

345M O+[Q>&&(>*PT

?\\M '(C(QS

4.G7.([[

?\\M (*CP*S

4.G7.Q&)>Q'*

?\\M 'TC+QS

4.G7.&&&>T+[>[*P

?\\M (+C'[S

4.G7.)')

?\\M (+C'[S

4.G7.


9/23

!""#$ T

second question is where do want to go capturing our strategic objectives. The last question is

how are we going to get there. We do this by formulating strategies to take advantage of

opportunities and mitigate risks.

After completing the SLRP, we moved on to the creation of the annual plan. The annual

plan is a management tool used for planning and controlling. It is utilized by the Finance

Department for a variety of purposes including marketing plan/sales forecast, and planning for

Headcount, production, Capital etc. The outputs are Income Statement, Balance Sheet, Cash

Flow.

Concluding the completion of the Annual plan, we completed the forecast, which is an update to

annual plan and is used for earnings pre announcements or warnings of expected miss or exceed

projections.

Strategic Long-Range Plan

Please reference Appendix D for the SLRP Model.

Where are we?

Currently Apple has developed an advantage against their competitors by branching out

in different markets, capitalizing in areas their competitors have yet to break into. Apple has

broken into the music industry, software industry, and the personal computer industry. Apple has

a wide variety of laptops, PCs as well as personal data devices capable of accessing the internet

and other software. The opportunities that Apple has capitalized on include a vast variety of

markets, spreading out their risk, allowing for growth to expand rapidly. Apple is currently in a

position to take over the new craze of mobile communications devices and personal net book

computers.

Where would we like to be?

Apple has the ability to rapidly expand their personal computing business market with

success that may mirror that of the iPod, iPhone, and MacBook devices. Apple would like to

capitalize their growth by allowing their consumers easy access to the internet via a mobile

storage and content manager, or netbook. Apple would like to see their success grow larger while

allowing for the accessibility and compatibility between other products that Apple has to offer.


10/23

!""#$ &Q

How do we plan to get there?

Apple has implemented a new device to their product line that links many similar

products competitors have, to a single, universal product. Apple will use their knowledge they

have acquired with similar products, such as the iPod and iPhone, to grow their new iCube into

the emerging personal computer market. If all financial data proves to be correct in years to

come, it will improve the financial condition of the company, which will lead to an increase in

shareholder value.

The strategic long-range plan shows where the company strives to be at in the next three

years of operation. Launching the iCube shows significant growth in the company, improving

margins and overall performance. As shown in the model, each years net income will be carried

over to retained earnings, growing nearly 40% in three years. This is accompanied by an increase

in operations from other products by in years 2, 3 and 4 by 6%, 4% and 5% respectively. The

company will finance $3 billion to launch the new product, through bonds at a 6% yield rate over

the course of the investment. This affects the financials in the first quarter of 2010, creating a

jump in long term debt of the company. Accounts receivable will maintain a steady 12% growth

from previous years in each of the three-year projections. Below are the projected financial

statements for 2009 through 2012.

Income Statements


11/23

!""#$ &&

Balance Sheet

SWOT Analysis

Apple designs, manufactures and markets personal computers and related software,

portable digital music players, and related accessories. The company markets third party audio

and video products, and provides related services. The company has a strong brand image,

which enables it to command a premium price for its products, giving it an edge over regional as


12/23

!""#$ &'

well as other global competitors. However, intense competition threatens to erode the market

share of the company.

Strengths-

Strong brand image.

o Brand Image improved to 13,724 million in 2008 from 11,037 million in 2007.

Robust financial experience.

o Total revenue increased from 6,207 million in 2003 to 32, 479 million in 2008.

Apples net income increased from 69 million in 2003 to 4,834 million in 2008.

(1.1% to 14.8%)

Focus on research and development.

o

Spent 1.1 billion in 2008 on research and development, $782 million in 2007,

$712 million in 2006.

Weaknesses-

Product recalls.

o Apple produces high quality products that sometimes contain defects due to the

high level of technicality. Product defects could harm reputation, warranty and

other expenses.

Patent infringement.

o In 2008 there were 13 patent infringement cases filed against apple. If Apple fails

to succeed in any infringement matters it could have unwarranted adverse effects

on the companies materials and financial position.

Steve jobs health.

o The companys CEO, Steve Jobs, has had many medical problems in the past.

Since many people associate Apple to its CEO, the retirement of Steve Jobs could

prove to be detrimental.

Opportunities-

Smartphones.

o Demand for the smartphone is greatly increasing and is projected to do so in the

future. Apple is capable of adapting to the increase in the market for smartphones.


13/23

!""#$ &(

New retail stores.

o The store opened a total of 247 retail stores. 205 in the united states and 42

internationally. Stores are designed to enhance the presentation and marketing of

the company and its products.

Threats-

Intense Competition.

o Highly competitive market could take away from Apples market share. Faces

intense competition in consumer electronics, personal computers and related

software.

Uncertain global economic conditions.

o With most of its business held in the US, there is not a major plan established to

conquer the global market.

Declining PC sales.

o PC sales are expected to decline in the near future. This decrease could affect the

financial performance of Apples desk top computers.

Dependence on specific suppliers.

o Since Apple acquires many of its parts from third parties. If these parties focus on

production and not on customizing parts for Apple it could affect the continued

availability of these components.

Annual Plan

Income Statement: Based on our earnings released our fiscal year in Q1 begins at the end of the

year in October through December, which traditionally is a heavy retail season. Thus this

resulted in our highest growth in Net Sales in Q1 of 29%, then 23% in Q2 and Q3, and last 25%

in Q4. Depreciation stayed the same as well as Operating Expenses and Interest Expense.

Balance Sheet: Increased debt to fund through the selling of bonds, thus resulting in the Net

Income conversion to cash. Increase Accounts Payable up to 9%, and increased Accounts

Receivable, too. Long Term debt was not affected and stayed the same in quarters 2 through 4.

Net Income carries over into the Retained Earnings.


14/23

!""#$ &)

Forecast

Please reference Appendix E for the annual plan and forecast analysis.

Our forecast is tied in with our annual plan, showing a growth in retained earnings in

quarter 4, while adjusting the net income to end out the year. The forecast shows us that our first

quarter sales numbers are significantly larger than the following quarters. This is due to the high

number of holiday shopping trends during the months of November and December. Our forecast

is important because it gives us an in depth look at what our goals will be each quarter, while

allowing us to prepare our sales projections in the years following.

Based upon conduction of the analysis of the SLRP, annual plan and forecast, we find the

data suggest a positive correlation towards the investment in this project. Adjustments must be

made according to our actual cash flows during the duration of the year. These projections in the

SLRP, annual plan, and forecast have been made to the best of our knowledge, and will be the

duty of the company to achieve the success put forth.

Cost of Capital Structure

Capital structure refers to the way a corporation finances its assets through a combination

of equity, debt, or securities. A firms capital structure is then the composition or structure of its

liabilities. In the following section we reviewed the following: Capital Asset Pricing Model

(CAPM), Weighted Average Cost of Capital (WACC), and Yield to Maturity (YTM).


15/23

!""#$ &*

Our results showed that the CAPM reflected an expected rate of return of 20.61%. This

value is ambiguous because we are estimating our market risk rate and beta value. The market

risk rate varies due to stock prices, interest rates, foreign exchange rates, and commodity prices.

WACC calculation of the firms cost of capital in which each category is proportionately

weighted. Apple weight of debt was calculated at 1.62% with a 98.38% of common equity

through the issuance of new long-term debt (bonds). YTM signified the anticipated rate of return

on a bond if it is held until the maturity date. While YTM is considered a long-term bond, it is

expressed in an annual percentage rate. Whilst the interest rate will remain constant as the

interest rate rises or decreases.

In conclusion the expected rate of return is through CAPM is 20.61%. This is a secured

return since Apple does not carry any other long-term debt and carries a 98.38% cost of equity;

yet, a beta factor of 1.5 theoretically indicates 50% more volatility than the market. One

consideration is that Apple is carrying a $3B debt on the balance sheet with $180M annually on

the income statement.

Pricing Structure, Terms and Conditions

Apple Inc. has an interest in protecting itself from any losses that occur due to a breach of

contract from a particular customer. Therefore Apple Inc. develops a pricing model that suits the


16/23

!""#$ &+

particular customer in regard of existing conditions. This pricing model includes terms and

conditions which are based on a set of assumptions that are made early in the process.

For our project we assume Apple Inc. has agreed to deliver 50,000 units of its I3 to a

particular customer over the next three years. In order to protect itself from any unpredicted

losses Apple Inc. identified this set of assumptions:

Assumptions:

Customer orders 50,000 units

Time period of three years

Customer follows the agreement based on terns and conditions

Customer wont have major employee lay-offs

Customer orders units for its US locations only

Service and Training is only requested at customers US locations

Apple Inc. based its pricing on this set of assumptions for this particular customer and

expects no significant change in external factors. The terms and conditions for this particular

customer have been developed as followed:

Terms and Conditions:

Effective dates of pricing

List Price $600

Customer agrees to buy 50,000 units at a 12% discount

Delivery over three (3) years

Payment due upon invoicing, terms 2 /10 Net 30 (This means the entire balance is due

within 30 days of the invoice, but the buyer can take a 2% cash discount if the bill is paid

within 10 days.

5 day turnaround on out of box failures and warranty repair

Price includes product, shipping, delivery, tax, 60 day warranty, software updates,

training If the customers orders less than 50,000 units the customer agrees to pay the full list

price.

In case of termination, for customer convenience, mergers or acquisitions the customer will

have to repay Apple Inc. for occurred cost, loss of profit, and unearned discount. Certain


17/23

!""#$ &P

penalties may apply. Reference Appendix F for the breakdown of the pricing structure and

termination costs.

Conclusion

?2


18/23


19/23

!""#$ &T

Appendix BBest Case Scenario


20/23

!""#$ 'Q

Appendix CWorst Case Scenario


21/23

!""#$ '&

Appendix DSLRP Model


22/23

!""#$ ''

Appendix EAnnual Plan and Forecast

Balance Sheets


23/23

!""#$ '(

Appendix FPricing Structure, Termination Costs

apple project investment feasability

Documents