For part 3 and 4 Please put your answers on XL, and how you plugged it in on XL. thanks

16 18 5 Webmasters.com has developed a powerful new server that would be used for corporations' Internet 6 activities. It would cost $10 million at Year O to buy the equipment necessary to manufacture the server. 7 The project would require net working capital at the beginning of each year in an amount equal to 10% of 8 the year's projected sales; for example, NWC, = 10%(Sales,). The servers would sell for $24,000 per unit, 9 and Webmasters believes that variable costs would amount to $17,500 per unit. After Year 1, the sales 10 price and variable costs will increase at the inflation rate of 3%. The company's nonvariable costs would 11 be $1 million at Year 1 and would increase with inflation. 12 13 The server project would have a life of 4 years. If the project is undertaken, it must be continued for the 14 entire 4 years. Also, the project's returns are expected to be highly correlated with returns on the firm's 15 other assets. The firm believes it could sell 1,000 units per year. 17 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 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 variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk 20 projects at 13%. 21 22 a. Develop a spreadsheet model, and use it to find the project's NPV, IRR, and payback. 23 24 Key Output NPV - 25 Part 1. Input Data (in thousands of dollars) IRR 26 27 Equipment cost $10,000 28 Net WC/Sales 10% Market value of equipment at Year 4 $500 29 First year sales (in units) 1,000 Tax rate 40% 30 Sales price per unit $24.00 WACC 10% 31 Variable cost per unit $17.50 Inflation 3.0% 32 Nonvariable costs $1.000 33 34 Part 2 Denreciation 19 MIRR = 2 3 40 41 Part 3. Net Salvage Values, in Year 4 Equipment 42 Estimated Market Value in Year 4 $500,000 43 Book Value in Year 4 44 Expected Gain or Loss 45 Taxes paid or tax credit 46 Net cash flow from salvage 48 Part 4. Projected Net Cash Flows (Time line of Annual Cash Flows) 49 Years 0 1 50 Investment Outfays at Time Zero: 51 Equipment (510,000) 52 53 Operating Cash Flows over the Project's Life: 54 Units sold 1,000 55 Sales price $24.00 58 Variable costs $17.50 57 58 Sales revenue $24,000 59 Variable costs 17,500 50 Nonvariable operating costs 1,000 61 Depreciation (equipment) 2,000 82 Oper. Income before taxes (EBIT) $3,500 63 Taxes on operating income (40%) 1,400 64 After-tax operating income $2,100 65 Add back depreciation 2,000 36 Operating cash flow $4,100 67 68 Terminal Year Cash Flows: 69 Required level of net working capital $2,400 70 Required investment in NWC (52,400) 71 72 Terminal Year Cash Flows: 73 Net salvage value Build a Model 0 a ($10,000) 1,000 $24.00 $17.50 Investment Outlays at Time Zero: 51 Equipment 52 3 Operating Cash Flows over the Project's Life: 54 Units sold 55 Sales price 56 Variable costs 57 58 Sales revenue 59 Variable costs 30 Nonvariable operating costs 51 Depreciation (equipment) 52 Oper, income before taxes (EBIT) 33 Taxes on operating income (40%) 54 After-tax operating income 35 Add back depreciation 56 Operating cash flow 37 58 Terminal Year Cash Flows: 39 Required level of net working capital O Required investment in NWC 11 72 Terminal Year Cash Flows: #3 Net salvage value 74 5 Net Cash Flow (Time line of cash flows) 76 $24,000 17,500 1,000 2,000 $3,500 1,400 $2,100 2,000 $4,100 $2,400 ($2,400) ($12,400) $4,100 $0 SO $0 16 18 5 Webmasters.com has developed a powerful new server that would be used for corporations' Internet 6 activities. It would cost $10 million at Year O to buy the equipment necessary to manufacture the server. 7 The project would require net working capital at the beginning of each year in an amount equal to 10% of 8 the year's projected sales; for example, NWC, = 10%(Sales,). The servers would sell for $24,000 per unit, 9 and Webmasters believes that variable costs would amount to $17,500 per unit. After Year 1, the sales 10 price and variable costs will increase at the inflation rate of 3%. The company's nonvariable costs would 11 be $1 million at Year 1 and would increase with inflation. 12 13 The server project would have a life of 4 years. If the project is undertaken, it must be continued for the 14 entire 4 years. Also, the project's returns are expected to be highly correlated with returns on the firm's 15 other assets. The firm believes it could sell 1,000 units per year. 17 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 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 variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk 20 projects at 13%. 21 22 a. Develop a spreadsheet model, and use it to find the project's NPV, IRR, and payback. 23 24 Key Output NPV - 25 Part 1. Input Data (in thousands of dollars) IRR 26 27 Equipment cost $10,000 28 Net WC/Sales 10% Market value of equipment at Year 4 $500 29 First year sales (in units) 1,000 Tax rate 40% 30 Sales price per unit $24.00 WACC 10% 31 Variable cost per unit $17.50 Inflation 3.0% 32 Nonvariable costs $1.000 33 34 Part 2 Denreciation 19 MIRR = 2 3 40 41 Part 3. Net Salvage Values, in Year 4 Equipment 42 Estimated Market Value in Year 4 $500,000 43 Book Value in Year 4 44 Expected Gain or Loss 45 Taxes paid or tax credit 46 Net cash flow from salvage 48 Part 4. Projected Net Cash Flows (Time line of Annual Cash Flows) 49 Years 0 1 50 Investment Outfays at Time Zero: 51 Equipment (510,000) 52 53 Operating Cash Flows over the Project's Life: 54 Units sold 1,000 55 Sales price $24.00 58 Variable costs $17.50 57 58 Sales revenue $24,000 59 Variable costs 17,500 50 Nonvariable operating costs 1,000 61 Depreciation (equipment) 2,000 82 Oper. Income before taxes (EBIT) $3,500 63 Taxes on operating income (40%) 1,400 64 After-tax operating income $2,100 65 Add back depreciation 2,000 36 Operating cash flow $4,100 67 68 Terminal Year Cash Flows: 69 Required level of net working capital $2,400 70 Required investment in NWC (52,400) 71 72 Terminal Year Cash Flows: 73 Net salvage value Build a Model 0 a ($10,000) 1,000 $24.00 $17.50 Investment Outlays at Time Zero: 51 Equipment 52 3 Operating Cash Flows over the Project's Life: 54 Units sold 55 Sales price 56 Variable costs 57 58 Sales revenue 59 Variable costs 30 Nonvariable operating costs 51 Depreciation (equipment) 52 Oper, income before taxes (EBIT) 33 Taxes on operating income (40%) 54 After-tax operating income 35 Add back depreciation 56 Operating cash flow 37 58 Terminal Year Cash Flows: 39 Required level of net working capital O Required investment in NWC 11 72 Terminal Year Cash Flows: #3 Net salvage value 74 5 Net Cash Flow (Time line of cash flows) 76 $24,000 17,500 1,000 2,000 $3,500 1,400 $2,100 2,000 $4,100 $2,400 ($2,400) ($12,400) $4,100 $0 SO $0