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Posted on Aug 28, 2024

Pinto.com has developed a powerful new server that would be used for corporations Internet activities. It would cost $25 million at Year 0 to buy

image text in transcribed Pinto.com has developed a powerful new server that would be used for corporations Internet activities. It would cost $25 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 years projected sales; for example, NWC0 = 12%(Sales1 ). The servers would sell for $21,000 per unit, and Pinto believes that variable costs would amount to $15,000 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 2.5%. The companys nonvariable costs would be $1.5 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 projects returns are expected to be highly correlated with returns on the firms other assets. The firm believes it could sell 2,000 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 projects 4-year life is $1 million. Pinto.coms federal-plus-state tax rate is 20%. 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 an 8% project cost of capital and high-risk projects at 13%.

Q.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. image text in transcribed

Q.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 worst-case conditions, with the variables 20% worse than base, and a 50% probability of base-case conditions. Q.If the project appears to be more or less risky than an average project, find its risk-adjusted NPV, IRR, and payback. Q.On the basis of information in the problem, would you recommend the project should be accepted?

image text in transcribed

Annual Sales cuantity Units 2.000 2.000 2.000 2.000 h Sale Price per unit 521.000 $31.135 527.065 $22615 cu Annual $42,000,000 $450,000 $44,325 230 545 229 400 o Unit variable Cost $15.000 $15.375 $15.759 $16.153 Innal variable Cost 550.000 0.5:10 750.000 61,511,75 593,6719 Fixed Costa Excluding Depreciation $1.500.000 $1.557,500 $1,575,938 $1,655 356 Depreciation $5,000,000 $8,000,000 $4,500,000 $2,880 000 he income before tax $5.500 000 $2.763,500 56.231.542 SB 437 352 Tex Expenses $1,100 DOO -$552,300 $1,615 470 NET INCOME $4,400.000 $2,210,000 $4,905,250 $6,741 881 Add Depreciation No Cash expenses 51.000.000 58.000.000' 54.800,000 52,880 000 Innual Operating Cash Flow $9.4000 $10 210.000 59,785,250 $9,621 A Ch flow for $25,000 1 Working Capital Needed12 of next year Revenue) $5,040.000 55.166.000 $5.295.150 55.427,529 50 w Working Capital Cachlow 55.040 DOO $126.000 -5139,150 -5137379 55. 437529 5 Salvage Cash Flow $1,664 000 CF=X+Y-W 5 NET CASH ROW $90,040.000 $9,274 000 $10080,850 $9,652,371 516,713,410 CUMULATIVE NETCAGROW -530,040 000 520.766.000 -510 685.150 -51,093,279 SIS. GBL13L SJM PVC/21NI PRESENT VALUE OF NET CASH FLOW -$50,040 000 58,450 900 $8.551.262 $7,252,345 $11.435 454 $5.300,019 NPVSUM of PV NET PRESENT VALUE $5,390 019 Payback Period Period at which Cumulative cash flow-NIL Payback period 53032279/16713410 3.06 YEARS IRR (Uing in function of excel) 17.30 Present Value(PV) of Cash Flow. Cash Flow)/([1+1 i=discount rate=Cost of capital=10%=0.1 N=Year of Cash Flow A 32.0096 $8,000,000 $13,000,000 CASH FLOW ANALYSIS DEPRECIATION EXPENSES Depreciable Assets Year 5-year MACRS RATE B-$25million A Annual Depreciation F Accumulated Depreciation Book value at end of year 4=25000000-20580000 Salvage Value at end of year 4 Loss on Salvage=4320000-1000000 Tax Saving on Loss 20% 3320000 After tax Salvage Cash Flow=1000000+664000= INCOME STATEMENT & CASH FLOW Year Annual Sales quantity (Units) b Sales Price per unit CE" Annual Revenue d Unit Variable Cast e ad Annual Variable Cost $25,000,000 1 20.00% $5,000,000 $5,000,000 $4,320,000 $1,000,000 $3 320 000 $664,000 $1 664,000 8 4 19.2096 11.52% $4,800,000 $2,880,000 $17,800,000 $20,680,000 N 0 1 2 3 4 2.000 2,000 2,000 2,000 $21,000 $21,525 $22,063 $22,515 $42,000,000 $43,050,000 $44,126,250' $45 229,406 $15,000 $15,375 $15,759 $16,153 -$30,000,000 $30,750,000-$31,518,750'$32,306,719 Clipboard Font Alignment Number Editing 144 IRR138:M38) A C D M F 4 21 22 25 27 26 29 30 31 2 33 ...u G M N N 0 3 Annual Sales cuantity 2.000 2.000 2.000 Sales Price per unit 521.000 $21.525 529,065 $22615 Annual Reven $42,000 $450,000 $44,325 230 545 229 400 d Unit variable cost $15.000 $15.375 $15,759 $16153 Innal variable Cost 550.000 0.510 750.000 551.51R 750-537, 506 719 Fised Costa Excluding Depreciation $1,500,000 $1557,500 $1,575,938 $1,635 356 Depreciation expenses $5,000,000 $8.000.000 54,800,000 $2,810 000 income before $5.500 000 52762.500 56.231.562 SB.227352 Tex Expenses -51,100 000 -$552,500 -51,245 -$1,685 470 NET INCOME $4,400 000 $2230,000 $4,905,250 $6,741 881 k Add Depreciation Non Cash expenses $5,000.00 58.000.000' 54.800,000 52.000000 X4 Annual Operating Cash Flow $9.400 000 $10210,000 $9,785,250 $9.6211 Y Dah flow for men $25,000000 Working Capital Needed (12 of next year Revenue) $5,040.000 $5,166.000 $5.295.150 $5,427,529 50 w Working Capital Canin $5.040 000 -5126 -5179 150 -$15.70 $5.477539 S Salvage Cash Flow $1,664 000 CFX 45 NET CASH FLOW $50,040 000 $9,274 000 $10080,850 $9.652,871 $16,713 410 CUMULATIVE NITCHLOW -530,000 000-520.766.000 -S10 GRS.150 -51,093,279 SIS. GBL13 SUM PVC/21NI PRESENT VALUE OF NET CASH FLOW $50,040 000 58,450 900 $ 550 251 57,252,345 $11435454 $5300019 NPVSUM of PV NET PRESENT VALUE $5,390.019 Payback Period Period at which Cumulative cash flow Payback Period-51052279/107114101 9.00 YEARS IRR (Uing in function of cael) 36 37 19 40 43 44 Annual Sales cuantity Units 2.000 2.000 2.000 2.000 h Sale Price per unit 521.000 $31.135 527.065 $22615 cu Annual $42,000,000 $450,000 $44,325 230 545 229 400 o Unit variable Cost $15.000 $15.375 $15.759 $16.153 Innal variable Cost 550.000 0.5:10 750.000 61,511,75 593,6719 Fixed Costa Excluding Depreciation $1.500.000 $1.557,500 $1,575,938 $1,655 356 Depreciation $5,000,000 $8,000,000 $4,500,000 $2,880 000 he income before tax $5.500 000 $2.763,500 56.231.542 SB 437 352 Tex Expenses $1,100 DOO -$552,300 $1,615 470 NET INCOME $4,400.000 $2,210,000 $4,905,250 $6,741 881 Add Depreciation No Cash expenses 51.000.000 58.000.000' 54.800,000 52,880 000 Innual Operating Cash Flow $9.4000 $10 210.000 59,785,250 $9,621 A Ch flow for $25,000 1 Working Capital Needed12 of next year Revenue) $5,040.000 55.166.000 $5.295.150 55.427,529 50 w Working Capital Cachlow 55.040 DOO $126.000 -5139,150 -5137379 55. 437529 5 Salvage Cash Flow $1,664 000 CF=X+Y-W 5 NET CASH ROW $90,040.000 $9,274 000 $10080,850 $9,652,371 516,713,410 CUMULATIVE NETCAGROW -530,040 000 520.766.000 -510 685.150 -51,093,279 SIS. GBL13L SJM PVC/21NI PRESENT VALUE OF NET CASH FLOW -$50,040 000 58,450 900 $8.551.262 $7,252,345 $11.435 454 $5.300,019 NPVSUM of PV NET PRESENT VALUE $5,390 019 Payback Period Period at which Cumulative cash flow-NIL Payback period 53032279/16713410 3.06 YEARS IRR (Uing in function of excel) 17.30 Annual Sales cuantity Units 2.000 2.000 2.000 2.000 h Sale Price per unit 521.000 $31.135 527.065 $22615 cu Annual $42,000,000 $450,000 $44,325 230 545 229 400 o Unit variable Cost $15.000 $15.375 $15.759 $16.153 Innal variable Cost 550.000 0.5:10 750.000 61,511,75 593,6719 Fixed Costa Excluding Depreciation $1.500.000 $1.557,500 $1,575,938 $1,655 356 Depreciation $5,000,000 $8,000,000 $4,500,000 $2,880 000 he income before tax $5.500 000 $2.763,500 56.231.542 SB 437 352 Tex Expenses $1,100 DOO -$552,300 $1,615 470 NET INCOME $4,400.000 $2,210,000 $4,905,250 $6,741 881 Add Depreciation No Cash expenses 51.000.000 58.000.000' 54.800,000 52,880 000 Innual Operating Cash Flow $9.4000 $10 210.000 59,785,250 $9,621 A Ch flow for $25,000 1 Working Capital Needed12 of next year Revenue) $5,040.000 55.166.000 $5.295.150 55.427,529 50 w Working Capital Cachlow 55.040 DOO $126.000 -5139,150 -5137379 55. 437529 5 Salvage Cash Flow $1,664 000 CF=X+Y-W 5 NET CASH ROW $90,040.000 $9,274 000 $10080,850 $9,652,371 516,713,410 CUMULATIVE NETCAGROW -530,040 000 520.766.000 -510 685.150 -51,093,279 SIS. GBL13L SJM PVC/21NI PRESENT VALUE OF NET CASH FLOW -$50,040 000 58,450 900 $8.551.262 $7,252,345 $11.435 454 $5.300,019 NPVSUM of PV NET PRESENT VALUE $5,390 019 Payback Period Period at which Cumulative cash flow-NIL Payback period 53032279/16713410 3.06 YEARS IRR (Uing in function of excel) 17.30 Present Value(PV) of Cash Flow. Cash Flow)/([1+1 i=discount rate=Cost of capital=10%=0.1 N=Year of Cash Flow A 32.0096 $8,000,000 $13,000,000 CASH FLOW ANALYSIS DEPRECIATION EXPENSES Depreciable Assets Year 5-year MACRS RATE B-$25million A Annual Depreciation F Accumulated Depreciation Book value at end of year 4=25000000-20580000 Salvage Value at end of year 4 Loss on Salvage=4320000-1000000 Tax Saving on Loss 20% 3320000 After tax Salvage Cash Flow=1000000+664000= INCOME STATEMENT & CASH FLOW Year Annual Sales quantity (Units) b Sales Price per unit CE" Annual Revenue d Unit Variable Cast e ad Annual Variable Cost $25,000,000 1 20.00% $5,000,000 $5,000,000 $4,320,000 $1,000,000 $3 320 000 $664,000 $1 664,000 8 4 19.2096 11.52% $4,800,000 $2,880,000 $17,800,000 $20,680,000 N 0 1 2 3 4 2.000 2,000 2,000 2,000 $21,000 $21,525 $22,063 $22,515 $42,000,000 $43,050,000 $44,126,250' $45 229,406 $15,000 $15,375 $15,759 $16,153 -$30,000,000 $30,750,000-$31,518,750'$32,306,719 Clipboard Font Alignment Number Editing 144 IRR138:M38) A C D M F 4 21 22 25 27 26 29 30 31 2 33 ...u G M N N 0 3 Annual Sales cuantity 2.000 2.000 2.000 Sales Price per unit 521.000 $21.525 529,065 $22615 Annual Reven $42,000 $450,000 $44,325 230 545 229 400 d Unit variable cost $15.000 $15.375 $15,759 $16153 Innal variable Cost 550.000 0.510 750.000 551.51R 750-537, 506 719 Fised Costa Excluding Depreciation $1,500,000 $1557,500 $1,575,938 $1,635 356 Depreciation expenses $5,000,000 $8.000.000 54,800,000 $2,810 000 income before $5.500 000 52762.500 56.231.562 SB.227352 Tex Expenses -51,100 000 -$552,500 -51,245 -$1,685 470 NET INCOME $4,400 000 $2230,000 $4,905,250 $6,741 881 k Add Depreciation Non Cash expenses $5,000.00 58.000.000' 54.800,000 52.000000 X4 Annual Operating Cash Flow $9.400 000 $10210,000 $9,785,250 $9.6211 Y Dah flow for men $25,000000 Working Capital Needed (12 of next year Revenue) $5,040.000 $5,166.000 $5.295.150 $5,427,529 50 w Working Capital Canin $5.040 000 -5126 -5179 150 -$15.70 $5.477539 S Salvage Cash Flow $1,664 000 CFX 45 NET CASH FLOW $50,040 000 $9,274 000 $10080,850 $9.652,871 $16,713 410 CUMULATIVE NITCHLOW -530,000 000-520.766.000 -S10 GRS.150 -51,093,279 SIS. GBL13 SUM PVC/21NI PRESENT VALUE OF NET CASH FLOW $50,040 000 58,450 900 $ 550 251 57,252,345 $11435454 $5300019 NPVSUM of PV NET PRESENT VALUE $5,390.019 Payback Period Period at which Cumulative cash flow Payback Period-51052279/107114101 9.00 YEARS IRR (Uing in function of cael) 36 37 19 40 43 44 Annual Sales cuantity Units 2.000 2.000 2.000 2.000 h Sale Price per unit 521.000 $31.135 527.065 $22615 cu Annual $42,000,000 $450,000 $44,325 230 545 229 400 o Unit variable Cost $15.000 $15.375 $15.759 $16.153 Innal variable Cost 550.000 0.5:10 750.000 61,511,75 593,6719 Fixed Costa Excluding Depreciation $1.500.000 $1.557,500 $1,575,938 $1,655 356 Depreciation $5,000,000 $8,000,000 $4,500,000 $2,880 000 he income before tax $5.500 000 $2.763,500 56.231.542 SB 437 352 Tex Expenses $1,100 DOO -$552,300 $1,615 470 NET INCOME $4,400.000 $2,210,000 $4,905,250 $6,741 881 Add Depreciation No Cash expenses 51.000.000 58.000.000' 54.800,000 52,880 000 Innual Operating Cash Flow $9.4000 $10 210.000 59,785,250 $9,621 A Ch flow for $25,000 1 Working Capital Needed12 of next year Revenue) $5,040.000 55.166.000 $5.295.150 55.427,529 50 w Working Capital Cachlow 55.040 DOO $126.000 -5139,150 -5137379 55. 437529 5 Salvage Cash Flow $1,664 000 CF=X+Y-W 5 NET CASH ROW $90,040.000 $9,274 000 $10080,850 $9,652,371 516,713,410 CUMULATIVE NETCAGROW -530,040 000 520.766.000 -510 685.150 -51,093,279 SIS. GBL13L SJM PVC/21NI PRESENT VALUE OF NET CASH FLOW -$50,040 000 58,450 900 $8.551.262 $7,252,345 $11.435 454 $5.300,019 NPVSUM of PV NET PRESENT VALUE $5,390 019 Payback Period Period at which Cumulative cash flow-NIL Payback period 53032279/16713410 3.06 YEARS IRR (Uing in function of excel) 17.30