6. (15 points) Google is considering purchasing additional cloud storage space (computers that store data) to allow customers to store more content online. The company estimates this improved service will help to generate additional advertising sales of $10 million at the end of the first year, and then $8 million at the end of the second year. After 2 years, Google expects to sell the cloud computers and generate a salvage value of 50% of the purchase price. The purchase price of the computers is $20 million (at date (). Google can depreciate the cloud computers with a straight-line method to $5 million at the end of year 2. The additional advertising sales will yield accounts receivable of $5 million at the end of year 1. At the end of year 2 all accounts receivable will be settled, that is, accounts receivable will be 0 at the end of year 2. Offering the new services also implies costs (from electricity and personnel that maintains the services), which are $0.5 million at the end of year 1, and will grow by 20% in the next year. The tax rate is 30%, and the appropriate discount rate for the project's unlevered free cash flows is 10%. Google currently (at date 0) has $5 million in cash and expects the cash to grow at 5%. The cash is needed for Google's operations no matter if the project is undertaken or not. The project is evaluated over its two-year life. You should assume that Google is a profitable company throughout. What is the NPV of this project, and should Google undertake the project? Year Revenues: 10 0.5 Costs +(20-5)/2 Depr. = 8 DO N Expenses: 0.5*1.2Costs+15/2Depr.= 8.1 EBIT: 2 -0.1 Oper. CF: 2 *(1-0.3) + 7.5=8.9 0.1 * (1.03) + 7.5 = 7.43 NCS: 20 -5 - (1-0.3) * (10-5) =-8.5 5 ANWC: 5 20.93 FCF: -20 3.9 NPV = -20 + 3.9/1.1 + 20.93/1.1^2 = 0.842975 rounded 0.84 Google should do the project. The cash does not affect the calculations for this project, since Google needs the cash for its operations in any case (it is not incremental)