Excel Activity: Issues in Capital Budgeting

Start with the partial model in the file Ch$13$ P$18$ Build a Model.xIsx.

Webmasters.com has developed a powerful new server that would be used for corporations' Internet

activities. It would cost $$11$ million at Year $0$ to buy the equipment necessary to manufacture the server. The project would require net working capital at the beginning of each

year in an amount equal to $12\%$ of the year's projected sales; for example, Sales ${?}_1).$ The servers would sell for $$25,500$ per unit, and Webmasters believes that

variable costs would amount to $$18,000$ per unit. After Year $1,$ the sales price and variable costs will increase at the inflation rate of $4\%.$ The company's nonvariable costs would

be $$2$ million at Year $1$ and would increase with inflation.

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 to be highly

correlated with returns on the firm's other assets. The firm believes it could sell $900$ units per year.

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 $4--$year life is $$400,000.$

Webmasters.com's federal$-$plus$-$state tax rate is $25\%.$ Its cost of capital is $10\%$ for average$-$risk projects, defined as projects with a coefficient of variation of NPV between $0\mathrm{.}8$ and

$1\mathrm{.}2.$ Low$-$risk projects are evaluated with a $7\%$ project cost of capital and high$-$risk projects at $13\%.$

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round

intermediate calculations.

Download spreadsheet Ch$13$ P$18$ Build a Model$-3$e$3$b$7$a$.$xlsx

a$.$ Develop a spreadsheet model, and use it to find the project's NPV$,$ IRR, and payback. Round your answer for the NPV to the nearest dollar and for the IRR and payback to

two decimal places.

b$.$ Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables'

values at $10\%$ and $20\%$ above and below their base$-$case values. Round your answers to the nearest dollar. Use a minus sign to enter a negative value, if any.

$\%$ Deviation from

NPV with Variables at Different Deviations from Base

Choose the correct graph.