Please include cell references in your response so I can understand calculations. :) Thank you

B D E F G H I J L 6 7 8 9 10 1 8/13/15 2 Chapter: 11 Estimating Cash Flows and Analyzing Risk 3 Problem: 18 4 5 Webmasters.com has developed a powerful new server that would be used for corporations Internet activities. It would cost $10 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 10% of the year's projected sales; for example, NWC. = 10%(Sales1). The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would amount to $17,500 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. 11 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. 14 Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm believes it 15 could sell 1,000 units per year. 16 17 18 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 19 capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. 20 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 Payback = 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 36 $500 3 $10,000 20.00% 32.00% 19.20% 11.52% $10,000 $500 37 Intermediate Calculations 38 Units sold 39 Sales price per unit (excl. depr.) 40 Variable costs per unit (excl. depr.) 41 Nonvariable costs (excl. de pr.) 42 Sales revenue 43 Required level of net operating working capital 44 Basis for depreciation 45 Annual equipment de pr. rate 46 Annual de preciation expense 47 Ending Bk Val: Cost - Accum Depirn 48 Salvage value 49 Profit (or loss) on salvage 50 Tax on profit (or loss) 51 Net cash flow due to salvage 52 53 Cash Flow Forecast 54 Sales revenue 55 Variable costs 56 Nonvariable operating costs 57 Depreciation (equipment) 58 Oper. income before taxes (EBIT) 59 Taxes on operating income (40%) 60 Net operating profit after taxes 61 Add back depreciation 62 Equipment purchases 63 Cash flow due to change in NOWC 64 Net cash flow due to salvage 65 Net Cash Flow (Time line of cash flows) 66 67 Key Results: Appraisal of the Proposed Project 68 Years 2 0 1 3 4 69 Net Present Value (at 10%) = 70 IRR = 71 MIRR = 72 Payback = 73 Discounted Payback 74 Data for Payback Years Years 75 0 1 2 3 76 Net cash flow 77 Cumulative CF 78 Part of year required for payback 79 80 81 Data for Discounted Payback Years Years 82 1 2 3 83 Net cash flow 84 Discounted cash flow 85 Cumulative CF 86 Part of year required for discounted payback 87 88 Based on your analysis, what recommendation (accept or reject) would you make about the server project? 89 90 91 B D E F G H I J L 6 7 8 9 10 1 8/13/15 2 Chapter: 11 Estimating Cash Flows and Analyzing Risk 3 Problem: 18 4 5 Webmasters.com has developed a powerful new server that would be used for corporations Internet activities. It would cost $10 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 10% of the year's projected sales; for example, NWC. = 10%(Sales1). The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would amount to $17,500 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. 11 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. 14 Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm believes it 15 could sell 1,000 units per year. 16 17 18 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 19 capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. 20 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 Payback = 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 36 $500 3 $10,000 20.00% 32.00% 19.20% 11.52% $10,000 $500 37 Intermediate Calculations 38 Units sold 39 Sales price per unit (excl. depr.) 40 Variable costs per unit (excl. depr.) 41 Nonvariable costs (excl. de pr.) 42 Sales revenue 43 Required level of net operating working capital 44 Basis for depreciation 45 Annual equipment de pr. rate 46 Annual de preciation expense 47 Ending Bk Val: Cost - Accum Depirn 48 Salvage value 49 Profit (or loss) on salvage 50 Tax on profit (or loss) 51 Net cash flow due to salvage 52 53 Cash Flow Forecast 54 Sales revenue 55 Variable costs 56 Nonvariable operating costs 57 Depreciation (equipment) 58 Oper. income before taxes (EBIT) 59 Taxes on operating income (40%) 60 Net operating profit after taxes 61 Add back depreciation 62 Equipment purchases 63 Cash flow due to change in NOWC 64 Net cash flow due to salvage 65 Net Cash Flow (Time line of cash flows) 66 67 Key Results: Appraisal of the Proposed Project 68 Years 2 0 1 3 4 69 Net Present Value (at 10%) = 70 IRR = 71 MIRR = 72 Payback = 73 Discounted Payback 74 Data for Payback Years Years 75 0 1 2 3 76 Net cash flow 77 Cumulative CF 78 Part of year required for payback 79 80 81 Data for Discounted Payback Years Years 82 1 2 3 83 Net cash flow 84 Discounted cash flow 85 Cumulative CF 86 Part of year required for discounted payback 87 88 Based on your analysis, what recommendation (accept or reject) would you make about the server project? 89 90 91