Proforma Income Statement The purpose of this assignment is to

estimate the cash flows from a project. Later in the semester,

we’ll return to this project and use the tools of capital budgeting

to determine if the project is desirable. Here, we simply want to

work through a proforma income statement to determine the cash

flows from the project. Below are some estimates that the marketing

department has determined. Other assumptions necessary for

completing the proforma income statement can be found by looking at

some of the historical averages of values in Cisco’s financial

statements.

Suppose Cisco (ticker symbol – csco) has decided to introduce a

new high speed router, the Cheetah. Before they launch the Cheetah,

they conducted an analysis to see if the Cheetah would be a

desirable investment. The company estimated that it would sell 10

million Cheetah’s per year at a price of $250 for the next six

years. After the first year of sales, the quantity sold will

increase by 3% per year for the remaining life of the project. The

initial capital outlay is determined to be $2.5 billion and a $500

million outlay in net working capital (NWC) would also be required.

Assume that there is a one-time investment in NWC and that this

will be recovered at the end of the project. Assume that the

equipment used will be depreciated using the MACRS 7 year schedule

and that the equipment has a salvage value of zero. At the end of

year 6, the equipment will be sold for 135% of its book value.

Also, assume that that the tax rate is 25%. Using information from

Cisco’s financial statements (you may want to use Morningstar.com

or some other online site) estimate the operating cash flows from

the project. Make any simplifying assumptions that are necessary to

produce the estimate.