I am only struggling with the Chapter 12 & 13 tab. Any help is greatly appreciated, Thanks!!

Chapter 12 & 13. Capital Budgeting: Decision Criteria, Cash Flows and Risk Webmasters.com has developed a powerful new server that would be used for corporations' Internet activities. It would cost $12 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 11% of the year's projected sales; for example, NWC0 = 11%(Sales1). The servers would sell for $25,000 per unit, and Webmasters believes that variable costs would amount to $18,500 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 3%. The company's nonvariable costs would be $1 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 1,100 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's 4-year life is $300,000. Webmasters' federal-plus-state tax rate is 35%. Its cost of capital is 9.5% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. a. Develop a spreadsheet model, and use it to find the project's NPV, IRR, and payback. Input Data (in thousands of dollars) Equipment cost Net operating working capital/Sales First year sales (in units) Sales price per unit Variable cost per unit (excl. depr.) Nonvariable costs (excl. depr.) Market value of equipment at Year 4 Tax rate WACC Inflation in prices and costs Estimated salvage value at year 4 $12,000 11% 1,100 $25.00 $18.50 $1,000 $300 35% 9.5% 3.0% $300 Intermediate Calculations Units sold Sales price per unit (excl. depr.) Variable costs per unit (excl. depr.) Nonvariable costs (excl. depr.) Sales revenue Required level of net operating working capital Basis for depreciation Annual equipment depr. rate Annual depreciation expense Ending Bk Val: Cost - Accum Dep'rn Salvage value Profit (or loss) on salvage Tax on profit (or loss) Net cash flow due to salvage Key Results: NPV = IRR = Payback = 0 $0 0.0% 0.00 1 2 3 4 1,100 $25.00 $18.50 1,000 $25.75 $19.06 $26.52 $19.63 $27.32 $20.22 20.00% 32.00% 19.20% 11.52% $12,000 $12,000 $300 0 1 Years 2 3 4 0 1 Years 2 3 4 0 Cash Flow Forecast Sales revenue Variable costs Nonvariable operating costs Depreciation (equipment) Oper. income before taxes (EBIT) Taxes on operating income Net operating profit after taxes Add back depreciation Equipment purchases Cash flow due to change in NOWC Net cash flow due to salvage Net Cash Flow (Time line of cash flows) 1 Years 2 3 4 Key Results: Appraisal of the Proposed Project Net Present Value (at WACC) = IRR = MIRR = Payback = Discounted Payback = Profitability Index Data for Payback Years Net cash flow Cumulative CF Part of year required for payback Data for Discounted Payback Years Net cash flow Discounted cash flow Cumulative CF Part of year required for discounted payback 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. Include a graph in your analysis. % Deviation from Base Case SALES PRICE Base $25.00 NPV -20% -10% 0% 10% 20% % Deviation from Base Case -20% -10% 0% VARIABLE COST Base NPV $18.50 % Deviation from Base Case -20% -10% 0% 10% 10% 20% 20% 1st YEAR UNIT SALES Base NPV 1,100 Deviation NPV at Different Deviations from Base from Sales Variable Base Case Price Cost/Unit Units Sold -20% $0 $0 $0 -10% $0 $0 $0 0% $0 $0 $0 10% $0 $0 $0 20% $0 $0 $0 Range $0 $0 $0 c. Now conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part b being 20% better than its base-case value, will occur. There is a 25% probability of worstcase conditions, with the variables 20% worse than base, and a 50% probability of base-case conditions. Scenario Best Case Base Case Worst Case Probability Sales Price Unit Sales Variable Costs 25% 50% 25% $30.00 $25.00 $20.00 $1,320 $1,100 $880 $22.20 $18.50 $14.80 NPV Expected NPV = Standard Deviation = Coefficient of Variation = Std Dev / Expected NPV = d. If the project appears to be more or less risky than an average project, find its risk-adjusted NPV, IRR, and payback. CV range of firm's average-risk project: Low-risk WACC = 8% WACC = 9.5% High-risk WACC = 12% 0.8 to 1.2 Risk-adjusted WACC = Risk adjusted NPV = IRR = Payback = e. On the basis of information in the problem, would you recommend that the project be accepted? Chapter 13. Risk Analysis through Monte Carlo Analysis of New Expansion Project Part I: Input Data Equipment cost Shipping charge Installation charge Economic Life Salvage Value Tax Rate Cost of Capital Units Sold Sales Price Per Unit Incremental Cost Per Unit NWC/Sales Inflation rate $200,000 $10,000 $30,000 4 $25,000 40% 10% Random variable = Random variable = Key Output: NPV = $0 Expected Value Std. Dev. 1,200 210 $205 $35 $100 12% 3% Valuation Analysis: Annual Depreciation Expense Depreciable Basis = Equipment + Freight + Installation Depreciable Basis = $240,000 Depr. $79,200 108,000 36,000 16,800 Year 2 Year 3 Year 4 0 $0.00 $100.00 0 $0.00 $103.00 0 $0.00 $106.09 0 $0.00 $109.27 $0 $0 0 0 79,200 108,000 ($79,200) ($108,000) (31,680) (43,200) ($47,520) ($64,800) 79,200 108,000 $31,680 $43,200 x = $0 0 36,000 ($36,000) (14,400) ($21,600) 36,000 $14,400 $0 0 16,800 ($16,800) (6,720) ($10,080) 16,800 $6,720 Year 1 $0 0 0 Year 2 $0 0 0 Year 3 $0 0 0 Year 4 $0 Year 0 % 0.33 0.45 0.15 0.07 Basis $240,000 240,000 240,000 240,000 Year 1 Year 1 2 3 4 Remaining Book Value $160,800 52,800 16,800 0 Year 1 Year 2 Year 3 0 $31,680 0 $43,200 0 $14,400 0 ($240,000) $31,680 $43,200 $14,400 Annual Operating Cash Flows Units Unit price Unit cost Sales Costs Depreciation Operating income before taxes (EBIT) Taxes (40%) EBIT (1 - T) Depreciation Net operating CF Annual Cash Flows due to Investments in Net Working Capital Year 0 Sales NWC (% of sales) CF due to investment in NOWC) 0 0 0 f. Calculate the after-tax salvage cash flow. After-tax Salvage Value Salvage value Book value Gain or loss Tax on salvage value Net terminal cash flow $25,000 0 $25,000 10,000 $15,000 Projected Net Cash Flows Investment Outlay: Long Term Assets Operating Cash Flows CF due to investment in NWC Salvage Cash Flows Net Cash Flows Year 4 ($240,000) $6,720 0 15,000 $21,720 NPV IRR How the Simulation Works Use a Data Table to perform the simulation (the Data Table is below, shaded bright yellow). When the Data Table is updated, it will insert new random variables for each of the inputs we allow to change in Panel A above, run the analysis is Panel C above, and then save the NPV for each trial (we also save the input variables for each trial so that we can verify that they are behaving as we expect). We set the first column of the Data Table (the variable to be changed in each row) to numbers from 1-100. We don't really use these numbers anywhere in the analyis, but if we tell the Data Table to treat these as the Column inputs, Excel will recalculate all items in the Data Table, including the random inputs and the resulting NPV. In other words, we "trick" Excel into doing a simulation. We tell Excel to insert each of the Column inputs in the Data Table into the cell immediately below this box. This cell isn't linked to anything else, but each time Excel updates a row of the Data Table, all the random values will be updated. Column input cell to "trick" Excel into updating random variables in Data Table: 1 Don't change the the red cell. Excel normally updates all values in a Data Table each time any cell that is related to the Data Table changes. In our case, we have random variables in the Data Table, so each time any cell in the worksheet makes a calculation, the Data Table is updated. If the Data Table has many rows, updating it can take up to 20 or 30 seconds. With only 100 rows, it updates very quickly. But if it bothers you, you can set the worksheet to do automatic calculation except for data tables. You don't need to change anything in this section. It will be updated automatically if you do a simulation. The summary of the simulation results and the histogram are based on the simulation trials n the Data Table below and are updated automatically when you do a simulation. You can do an updated simulation by hitting the F9 key. Figure 13-7 Summary of Simulation Results (Thousands of Dollars) Number of Trials = 0 Simulated Input Variables and Key Results Key Results: Sales Price Per Units Sold Unit NPV Mean Standard deviation Maximum Minimum Median Probability of NPV > 0 Coefficient of variation Scratch work for chart: see comments. Probabilities 12 10 8 6 4 2 0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Output of Simulation in Data Table Sales Price Per Units Sold Unit 0 $0 Trial Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 NPV $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Range bottom $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Sum Count #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! - Percent #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 265 266 267 268 269 270 271 272 273 274 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 298 299 300 301 302 303 304 305 306 307 308 309 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 386 387 388 389 390 391 392 393 394 395 396 397 398 399 400 401 402 403 404 405 406 407 408 409 410 411 412 413 414 415 416 417 418 419 420 421 422 423 424 425 426 427 428 429 430 431 432 433 434 435 436 437 438 439 440 441 442 443 444 445 446 447 448 449 450 451 452 453 454 455 456 457 458 459 460 461 462 463 464 465 466 467 468 469 470 471 472 473 474 475 476 477 478 479 480 481 482 483 484 485 486 487 488 489 490 491 492 493 494 495 496 497 498 499 500 Chapter 14. Real Options Bradford Services Inc. (BSI) is considering a project that has a cost of $10 million and an expected life of 3 years. There is a 30 percent probability of good conditions, in which case the project will provide a cash flow of $9 million at the end of each year for 3 years. There is a 40 percent probability of medium conditions, in which case the annual cash flows will be $4 million, and there is a 30 percent probability of bad conditions and a cash flow of -$1 million per year. BSI uses an 11 percent cost of capital to evaluate projects like this. a. Find the project's expected cash flows and NPV. WACC= 11% Condition Good Medium Bad Probability CF CF x Prob. 30% $9 40% $4 30% -$1 Expected CF= Time line of Expected CF 0 -$10 1 2 3 NPV= b. Now suppose the BSI can abandon the project at the end of the first year by selling it for $6 million. BSI will still receive the Year 1 cash flows, but will receive no cash flows in subsequent years. Assume the salvage value is risky and should be discounted at the WACC. WACC= Risk-free rate = 11% 4% Salvage Value = $6 Decision Tree Analysis Cost 0 -$10 Probability 1 Future Cash Flows 2 3 NPV this Probability Scenario x NPV 30% 40% 30% Expected NPV of Future CFs = c. Now assume that the project cannot be shut down. However, expertise gained by taking it on will lead to an opportunity at the end of Year 3 to undertake a venture that would have the same cost as the original project, and the new project's cash flows would follow whichever branch resulted for the original project. In other words, there would be a second $10 million cost at the end of Year 3, and then cash flows of either $9 million, $4 million, or -$1million for the following 3 years. Use decision tree analysis to estimate the value of the project, including the opportunity to implement the new project in Year 3. Assume the $10 million cost at Year 3 is known with certainty and should be discounted at the risk-free rate of 4 percent. Hint: do one decision tree for the operating cash flows and one for the cost of the project, then sum their NPVs. WACC= Risk-free rate = Decision Tree Analysis Cost 0 Probability -$10 11% 4% 1 Future Operating Cash Flows (Discount at WACC) 2 3 4 5 6 NPV this Scenario Prob. x NPV 30% 40% 30% Expected NPV of Future Operating CFs = 0 Future Cost of Implementing Additional Project (Discount at Risk-free rate) NPV this Probability 1 2 3 4 5 6 Scenario 30% 40% 30% Expected NPV of Future Operating CFs = Total NPV (NPV of Future Operating CF plus NPV of Future Year 3 cost of implenting additional project) = Prob. x PV d. Now suppose the original (no abandonment and no additional growth) project could be delayed a year. All the cash flows would remain unchanged, but information obtained during that year would tell the company exactly which set of demand conditions existed. Use decision tree analysis to estimate the value of the project if it is delayed by 1 year. Hint: Discount the $10 million cost at the risk-free rate since it is known with certainty. Show two time lines, one for operating cash flows and one for the cost, then sum their NPVs. WACC= Risk-free rate = 11% 4% Decision Tree Analysis: Optg. CFs 0 Probability 1 Future Operating Cash Flows (Discount at WACC) 2 3 4 NPV this Probability Scenario x NPV 30% 40% 30% Expected PV of Future CFs = Decision Tree Analysis: Costs Cost 0 Probability 1 Future Cost of Implementation (Discount at Risk-Free Rate) 2 3 4 NPV this Probability Scenario x NPV 30% 40% 30% Expected PV of Future CFs = Total NPV (NPV of Future Operating CF plus NPV of Future Year 1 cost of implenting additional project) = e. Go back to part c. Instead of using decision tree analysis, use the Black-Scholes model to estimate the value of the growth option. The risk-free rate is 4 percent, and the variance of the project's rate of return is 26 percent. Risk-free rate= 4% Variance of project's rate of return= 26% rRF = t= X= P= s2 = Financial Option Risk-free interest rate Time until the option expires Strike price Current price of the underlying sto Variance of the stock's rate of retur = = = = = Real Option Risk-free interest rate Time until the option expires Cost to implement the project Current value of the additional project Variance of the project's rate of return Find current value of the additional project's cash flows. This includes all cash flows except cost of implementation. Cost 0 Future Operating Cash Flows of Additional Project (Discount at WACC) Probability 1 2 3 4 5 6 NPV this Scenario 30% 40% 30% Expected NPV of Future Operating CFs = rRF = t= X= P= s2 = d1 = d2 = N(d1)= N(d2)= { ln (P/X) + [rRF + s 2 /2) ] t } / (s t1/2 ) d1 - s (t 1 / 2) = = V = P[ N (d1) ] - Xe-rRF t [ N (d2) ] = Value of original project= Value of growth option= Total Value= Prob. x NPV