A B D E F G H 12 13 The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project's returns are expected 14 to be highly correlated with returns on the firm's other assets. The firm believes it could sell 1,000 units per year. 15 16 17 TO The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the equipment at the end of the project's 4-year 19 life is $500,000. Webmasters' federal-plus-state tax rate is 40%. Its cost of capital is 10% for average-risk projects, defined as projects with a coefficient of 20 variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%. 21 22 a. Develop a spreadsheet model, and use it to find the project's NPV, IRR, and payback. 23 24 Input Data (in thousands of dollars) 25 Equipment cost $10,000 Key Results: 26 Net operating working capital/Sales 10% NPV = 27 First year sales (in units) 1,000 IRR 28 Sales price per unit $24.00 MIRR 29 Variable cost per unit (excl. depr.) $17.50 30 Nonvariable costs (excl. depr.) $1,000 31 Market value of equipment at Year 4 $500 32 Tax rate 40% 33 WACC 10% 34 Inflation in prices and costs 3.0% 35 Estimated salvage value at year 4 $500 36 37 Part 1: Initial Investment Outlay 38 39 * Change in NWC 40 41 Equipment cost 42 Shipping and installation costs 43 44 45 Initial Investment Outlay=- (Equipment cost+ Shipping and installation+ change in net operating working capital) 46 47 48 Part 2: project operating cash flows 49 50 * Depreciation expense 1 2 3 51 Basis for depreciation $10,000 52 Annual equipment depr. rate 20.00% 32.00% 19.20% 53 Annual depreciation expense 54 Ending Bk Val: Cost - Accum Dep'rn $10,000 4 11.52% A B D E F 1 2 3 4 56 * EBIT 57 58 Sales 59 Operating cost 60 Nonoperating cost 61 Depreciation expense 62 EBIT 63 TAX 64 NOPAT= EBIT(1-T) 65 66 * Operating cash flows 67 68 NOPATEEBIT(1-T) 69 Depreciation expense 70 Operating Cash flow B D E F $500 A 74 75 * After tax salvage value 76 Salvage value 77 Book value 78 Net gain or loss 79 Tax paid or tax credit 80 net cash flow from salvage 81 82 * Change NWC 83 84 Terminal value= After tax salvage value + change in NWC 85 86 87 Part 4: Project net cash flows 88 0 1 2 3 90 91 initial Investment Outlays at Time Zero: Operating Cash Flows over the Project's Life: Terminal Year Cash Flows: 92 A B D E F G H 12 13 The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project's returns are expected 14 to be highly correlated with returns on the firm's other assets. The firm believes it could sell 1,000 units per year. 15 16 17 TO The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the equipment at the end of the project's 4-year 19 life is $500,000. Webmasters' federal-plus-state tax rate is 40%. Its cost of capital is 10% for average-risk projects, defined as projects with a coefficient of 20 variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%. 21 22 a. Develop a spreadsheet model, and use it to find the project's NPV, IRR, and payback. 23 24 Input Data (in thousands of dollars) 25 Equipment cost $10,000 Key Results: 26 Net operating working capital/Sales 10% NPV = 27 First year sales (in units) 1,000 IRR 28 Sales price per unit $24.00 MIRR 29 Variable cost per unit (excl. depr.) $17.50 30 Nonvariable costs (excl. depr.) $1,000 31 Market value of equipment at Year 4 $500 32 Tax rate 40% 33 WACC 10% 34 Inflation in prices and costs 3.0% 35 Estimated salvage value at year 4 $500 36 37 Part 1: Initial Investment Outlay 38 39 * Change in NWC 40 41 Equipment cost 42 Shipping and installation costs 43 44 45 Initial Investment Outlay=- (Equipment cost+ Shipping and installation+ change in net operating working capital) 46 47 48 Part 2: project operating cash flows 49 50 * Depreciation expense 1 2 3 51 Basis for depreciation $10,000 52 Annual equipment depr. rate 20.00% 32.00% 19.20% 53 Annual depreciation expense 54 Ending Bk Val: Cost - Accum Dep'rn $10,000 4 11.52% A B D E F 1 2 3 4 56 * EBIT 57 58 Sales 59 Operating cost 60 Nonoperating cost 61 Depreciation expense 62 EBIT 63 TAX 64 NOPAT= EBIT(1-T) 65 66 * Operating cash flows 67 68 NOPATEEBIT(1-T) 69 Depreciation expense 70 Operating Cash flow B D E F $500 A 74 75 * After tax salvage value 76 Salvage value 77 Book value 78 Net gain or loss 79 Tax paid or tax credit 80 net cash flow from salvage 81 82 * Change NWC 83 84 Terminal value= After tax salvage value + change in NWC 85 86 87 Part 4: Project net cash flows 88 0 1 2 3 90 91 initial Investment Outlays at Time Zero: Operating Cash Flows over the Project's Life: Terminal Year Cash Flows: 92