MBA643: Analysis of Project Risk, Financing, and Monitoring for Apple

This report provides a comprehensive analysis of project risk management, financing, and monitoring, focusing on Apple Inc. It begins with an executive summary and explores project selection methods (NPV and IRR), cost management strategies (estimation, budgeting, and opportunity cost), and funding sources (equity and debt). The report recommends the use of NPV for project selection and suggests strategies for optimal cost management and funding. Part B of the report conducts a capital budgeting analysis for Apple, including a free cash flow summary, NPV calculation, and investment recommendations. The analysis highlights the importance of considering the cost of capital and the project life cycle phases. The report concludes with recommendations for Apple to optimize its financial strategies and manage project risks effectively, emphasizing the need to consider the cannibalizing effect of new products and the importance of a well-defined project life cycle.

PROJECT RISK, FINANCING, AND MONITORING
Project Risk, Financing, and Monitoring
Assessment 3

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PROJECT RISK, FINANCING, AND MONITORING
Table of Contents
Part A.........................................................................................................................................3
Executive Summary...................................................................................................................3
Project Selection........................................................................................................................3
Cost Management......................................................................................................................4
Funding......................................................................................................................................4
Implementation and winding up................................................................................................5
Conclusion and Recommendation.............................................................................................6
Part B..........................................................................................................................................6
Equity Capital and Apple...........................................................................................................6
FCF Summary............................................................................................................................8
NPV of the Project.....................................................................................................................8
Recommendation on Investment................................................................................................8
Other sources of Finance............................................................................................................9
References................................................................................................................................10

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Part A
Executive Summary
The report provides an overview of the issues related to project management. The report
starts with a brief on the two project selection methods- Net present value (NPV) and internal
rate of return (IRR) including the benefits and drawbacks of each. Apple is recommended to
use NPV criterion for project selection. The report continues with cost management tools and
strategies used during the course of a project and recommends Apple to include strategies like
cost estimation, budgeting, opportunity cost and relevant cost while evaluating and managing
a project. The report further details on the funding sources available to a company. Apple is
recommended to use a funding source which lowers the total cost of capital. Finally the report
details the processes involved in a project life cycle.
Project Selection
Key project selection tools used are:
Net Present Value- The is the difference between present value of all cash inflows and
outflows of a project over a period of time (Accounting Tools, 2018). Positive NPV projects
are wealth increasing. NPV is dependent on the discount rate used for discounting the
estimated future cash flows.
IRR- The internal rate of return is the discount rate which makes the present value of future
cash flows equal the initial cash outflow. For selection, projects with IRR greater than
required rate of return are selected
Where NPV and IRR rank mutually exclusive projects differently, projects are selected based
on NPV since high IRR does not guarantee higher profit figures.
For Apple, every Monday is a review day for evaluating the projects for resource
optimisation (Interaction Design Foundation, 2019). Products like iPhones emerging from

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R&D activities in Apple have passed the feasibility stage majorly through NPV criteria where
discount rate used is required return on investment. Apple’s goal has always been to pursue
and maintain greatest possible profits through expensive products (Apple, 2018).
Consequently, NPV is the the major criteria in project selection since NPV provides inputs to
amount of profit addition from new project.
Cost Management
Cost manager is entrusted with the duty of managing costs during course of a project, from
initiation till close out (Barhale, 2019). The importance of cost manager emanates from
controlling of costs at optimum levels at all stages of the project and minimisation of future
liabilities to maximise the value of the project at the required quality standard.
Strategies recommended for Apple to manage projects are (Lohrey, 2019):
1. Estimation of costs- For Apple, cost estimation of projects would involve accurate
projections based on fixed, variable, direct and indirect criteria.
2. Budgeting- Through cost budgets, Apple management would be able to ensure that actual
costs do not go off limits during course of a project thus ensuring expected profits remain
above feasible limits.
3. Relevant cost strategy- While evaluating projects, Apple needs to include costs in a project
based on whether the costs can be avoided or reduced while going ahead with a project.
4. Opportunity cost strategy- For estimating project costs, Apple should ensure that
opportunity costs are considered instead of accounting costs.
Funding
Two basic finding sources are:
Equity-Apple can also raise equity from the market or use retained earnings which are a part
of shareholders’ equity (toppr, 2019). While no fixed payments are required to be made,

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shareholders are the owners of the company and expect income in the form of dividends
and/or capital gains from share price appreciation. Retained earnings are better than raising
equity since cost of raising equity can be avoided apart from ownership dilution.
Debt- For investing in a project, Apple can consider borrowing money from individuals or
financial institutions. Debt holders demand a lower return from a company as compared to
equity holders since risk involved in investing in a company’s debt is much lower. Company
is contractually obligated to pay for interest and principal repayment on maturity.
Since Apple needs to be very secretive about its research and development projects and
raising deb/equity would involve divulging the secrets, Apple should give first preference to
internal source of funding or retained earnings, as advocated by pecking order theory.
However, considering the level of profits, Apple can raise higher amount of low cost debt and
lower its cost of financing.
Implementation and winding up
The project management cycle involves four phases- initiation, planning, execution and
closure (BC campus, 2019). The initiation process involves developing a business case
through idea generation and feasibility study, identifying the project scope and products to be
delivered and evaluating the impact on stakeholders. The planning phase involves breaking
down the whole project into smaller tasks for detailed analysis, building a team to oversee the
project, preparing a work breakdown structure for scheduling of tasks, gathering resources
and estimating the budget. Project execution involves creation of tasks and workflow
organisation, ensuring regular interaction from stakeholders, monitoring and controlling the
work quality and evaluating variances from budgets for corrective actions. The closure phase
involves reviewing and documenting project and team performance and accounting for and
allocating unused resources for other projects.

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Apple possesses valuable research and development facilities as well as a high-tech team
capable of disruptive innovations and production. As a reputed company with a long track
record of profitability, Apple is capable of raising capital from market required for project
infrastructure. For new project implementation, Apple needs to evaluate the cannibalising
effects of introducing new products over existing product line, and environmental issues
involved with replacement of existing mobile device with the new deliverable.
Conclusion and Recommendation
Companies in the technology sector like Apple are always engaged in feasibility studies
while striving for new product innovations and commercialisation. Major project selection
tools are net present value and internal rate of return. For mutually exclusive projects, Apple
should favour projects with higher net present value. For calculating NPV, Apple needs to do
a accurate projection of future costs and this would be possible through use of strategies like
cost estimation prior to starting the project, budgeting during project planning and inclusion
of relevant and opportunity costs. As for choosing among funding options, Apple should
strive for optimal capital structure by choosing debt equity ratio which minimises the cost of
capital. Finally, the process of the project life cycle from implementation to winding up
involves several steps which need to be taken care of for achieving success in projects. In this
respect, Apple needs to consider the cannibalising effect of new products over sales of old
products while implementing the new projects.
Part B
Equity Capital and Apple
Apple has been buying back shares for the last several years to bring down its idle cash
reserve and also to raise its debt equity ratio to lower its cost of capital (Above Avalon,
2019).

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Companies raise equity capital when they need money for existing operations or expansion.
While debt is a cheaper source of financing, equity capital does not come with the obligation
of paying interest irrespective of profits made.
Share Price of Apple has recently gone down
Figure 1. Source: Adapted from (Yahoo Finance, 2019)
The company has recently seen fall in share price since April 2019 owing to dip in iPhone
demand in China (Stevens, 2019). The slowdown has been due to increasing competition in
smartphone market and price war. Further, the slashing of iPhone series prices to combat
competition has resulted in fall in intrinsic value as estimated by analysts.

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FCF Summary
Figure 2
Free cash flow for each period from year 1 to 3 is $1.31 million and $3.04 million for Year 4.
(It is assumed that variable cost of existing iPhone is also 20% of revenue)
NPV of the Project
Figure 3
NPV of the project is $0.3 million meaning thereby that the project is feasible.
Recommendation on Investment
Apple should invest in this project since it is resulting in wealth increment of $0.30 million.

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Other sources of Finance
For Apple, effective interest rate on bonds is considerably lower around 3%-5% (Apple,
2018). Considering a marginal cost of debt of 5% and after-tax cost of 3.5%, the NPV would
be higher by $0.98 million.
Figure 4

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References
Interaction Design Foundation, 2019. Apple’s Product Development Process – Inside the
World’s Greatest Design Organization. [Online] Available at: https://www.interaction-
design.org/literature/article/apple-s-product-development-process-inside-the-world-s-
greatest-design-organization [Accessed 27th May 2019].
Apple, 2018. Form 10-K. [Online] Available at: http://d18rn0p25nwr6d.cloudfront.net/CIK-
0000320193/68027c6d-356d-46a4-a524-65d8ec05a1da.pdf [Accessed 27th May 2019].
Autocar, 2019. 200 staff axed from Apple's Project Titan autonomy project. [Online]
Available at: https://www.autocar.co.uk/car-news/new-cars/200-staff-axed-apples-project-
titan-autonomy-project [Accessed 27th May 2019].
Stevens, P., 2019. Apple has shed $130 billion in market cap since its May high. [Online]
Available at: https://www.cnbc.com/2019/05/21/apple-having-worst-month-of-the-year-but-
one-expert-says-its-a-buy.html [Accessed 21st May 2019].
Yahoo Finance, 2019. Apple Inc. (AAPL). [Online] Available at:
https://finance.yahoo.com/quote/AAPL/history?
period1=1545935400&period2=1558895400&interval=1d&filter=history&frequency=1d
[Accessed 27th May 2019].
Above Avalon, 2019. Apple's $400 Billion Buyback Program. [Online] Available at:
https://www.aboveavalon.com/notes/2019/4/24/apples-400-billion-buyback-program
[Accessed 24th Apr 2019].
Accounting Tools, 2018. The difference between NPV and IRR. [Online] Available at:
https://www.accountingtools.com/articles/the-difference-between-npv-and-irr.html [Accessed
27th May 2019].

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Barhale, 2019. Quantity Surveyor (Cost Manager). [Online] Available at:
http://www.barhale.co.uk/wp-content/uploads/2016/07/Quantity-Surveyor-@one-Cost-
Manager-1.pdf [Accessed 27th May 2019].
Lohrey, J., 2019. Cost Management Strategies for Business Decisions. [Online] Available at:
https://smallbusiness.chron.com/cost-management-strategies-business-decisions-78054.html
[Accessed 27th May 2019].
toppr, 2019. Capital Structure. [Online] Available at:
https://www.toppr.com/guides/business-studies/financial-management/capital-structure/
[Accessed 27th May 2019].
BC campus, 2019. The Project Life Cycle (Phases). [Online] Available at:
https://opentextbc.ca/projectmanagement/chapter/chapter-3-the-project-life-cycle-phases-
project-management/ [Accessed 27th May 2019].