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Apple 1

I
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Project Investment
Feasibility Study
3/2/10
Apple, Inc.



















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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)










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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 1.2
Quick 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%
Apple 4
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.

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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.

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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
We have uevelopeu an NPv mouel baseu upon a new piouuct to Apple, Incoipoiateu
calleu the "iS". The piouuct is a low cost lap top, light in weight anu smallei in size than
anything cieateu by Apple in the past. The laptop upholus the same capabilities anu
memoiy as any othei computei that Apple piouuces. The piouuct is similai to a "Net Book"
that Bewlett Packaiu oiiginally cieateu anu pioviues a stiong benchmaik in the inuustiy
foi Apple, Inc.
Below I have placeu the initial paiameteis cieateu foi the NPv Nouel foi the "iS":
Initial investment - $S billion
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Iiielevant cost - $S,Suu,uuu
o Encompasses planning anu tiavel costs
1S% cost of capital
29% tax iate
Cost
o Selling piice pei unit- $Suu
o Cost pei unit- $22S
Sales volume
o Yeai 1- 7 million
o Yeai 2- 7.21 million (S% inciease fiom piioi yeai)
o Yeai S- 7.S7 million (S% inciease fiom piioi yeai)
o Yeai 4- 8.2S million (9% inciease fiom piioi yeai)
o Yeai S- 8.8 million (7% inciease fiom piioi yeai)
Explanation anu Results
Please iefei to incluueu spieausheets in appenuix A, B anu C foi the base case, best case,
anu woise case scenaiio NPv mouels.

Is the investment woith moie in the maiketplace than it cost to acquiie.
Yes, oui NPv mouel showeu that oui "iS" investment woulu inciease shaieholuei value,
auu value to the oiganization anu piouuce inciemental ievenue aftei 2.S1 yeais.
1. Below I have placeu the base case analysis:
NPv: $1,86S,u46,uu1
IRR: S6.28%
Payback: 2.S1 yeais
2. Below I have placeu the best case analysis: (1.2% volume inciease & 1.1% selling
piice inciease)
NPv: $S,728,189,SuS
IRR: S4.SS%
Payback: 1.8u yeais
S. Below I have placeu the woist case analysis: (.8% ueciease & 1.1% inciease in cost)
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NPv: $68u,11S,S79
IRR: 2S.Su%
Payback: 2.89 yeais
4. Below I have placeu the tax iate sensitivity analysis: (1% inciease)
NPv: $1,814,278,S88
IRR: SS.7S%
Payback: 2.SS yeais
S. Below I have placeu the piice sensitivity analysis: (1S% inciease in cost)
NPv: $1,2S1,u14,u2S
IRR: 29.6u%
Payback: 2.S9 yeais
6. Below I have placeu the base case analysis:
NPv: $1,86S,u46,uu1
IRR: S6.28%
Payback: 2.S1 yeais
7. Below I have placeu the "Re-iun" mouel analysis utilizing the new cost of capital
fiom #4: (uebt & equity 24.S7%)
NPv: $1,111,968,8S7
IRR: S6.28%
Payback: 2.S1 yeais
8. Below I have placeu the "Re-iun" mouel analysis utilizing the new cost of capital
fiom #4: (bonus S9.6%)
NPv: $179,218,424
IRR: S6.28%
Payback: 2.S1 yeais
SLRP, Annual Plan, SWOT Analysis, and Forecast
The Strategic Long Range Plan (SLRP) is a 3-5 year plan with projected income
statement, balance sheets, and cash flow statements. It answers three questions: where are we?
Which is relevant to the current position relative to competitors and it recognizes risks and
opportunities in the marketplace. We performed a SWOT analysis to determine this. The
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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.
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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
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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
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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.
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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.

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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).










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

Conclusion

In conclusion, the uecision to go with bonus is uue to the fact that Apple uiu not
caiiy any pievious uebt. The WACC of Apple caiiies less than 2% in oui uebt to equity
iatio. The inuentuie will uemonstiate that we will issue S,uuu,uuu shaies of Apple at
$1,uuu with an expecteu iate of ietuin of 2u.61%. Apple will neeu to be awaie of the
economy as inteiest iates iise anu is piotecteu by a call piovision at any time. The impact
of the balance sheet is $SB with caiiieu inteiest payments on the income statement. These
piojections ieflect on oui annual plan, anu stiategic long-iange plan, allowing foi Apple to
stay on point foi the next thiee yeais.
The feasibility stuuy of this pioject ievealeu positive NPv valuations, an IRR of
above aveiage ietuins anu a shoit payback peiiou; ultimately iesulting in a pioject woithy
of acceptance. The IS pioject will continue to place Apple, Incoipoiateu at the foiefiont of
consumei technology innovation anu specifically auu shaieholuei value.
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Appendix A
Base Case


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Appendix B
Best Case Scenario



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Appendix C
Worst Case Scenario


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Appendix D
SLRP Model

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Appendix E
Annual Plan and Forecast


Balance Sheets

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Appendix F
Pricing Structure, Termination Costs

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