RIC.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 equal to 10% of sales; NOWC0 = 10%(Sales1), NOWC1 = 10%(Sales2), etc. 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 would increase at the inflation rate of 3%. The companys non-variable 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 projects returns are expected to be highly correlated with returns on the firms other assets. The firm believes it could sell 1,000 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 $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 for NPV between 0.8 and 1.2. Low risk projects are evaluated with a WACC of 8%, and high risk projects at 13%.

A B C D E F G H I 24 5 Part 6. Evaluating Risk: Sensitivity Analysis different unit sales, holding 7 I. Sensitivity of NPV to Changes in Inputs. Here we use an Excel "Data Table" to find NPV 3 other thing constant. WACC NPV 3,463 % Deviation from Base Case -20% -10% 0% 10% 20% WACC 8.0% 9.0% 10.0% 11.0% 12.0% $3,463 $3,463 % Deviation from Base Case -20% -10% SALES PRICE Sales NPV Price $3,463 $19.20 -S5,893 $21.60 -$1,215 $24.00 $3,463 $26.40 $8,141 $28.80 $12,820 0% 10% 20% 0% Deviation 1st YEAR UNIT SALES 1 from Units NPV 2 Base Case Sold $3,463 3 -20% 800 $1,045 4 -10% 900 $2,254 5 0% 1,000 $3,463 6 10% 1,100 $4,673 7 20% 1,200 $5,882 8 9 % Deviation VARIABLE COSTS 0 from Variable NPV 1 Base Case Costs 2 -20% $14.00 $10,401 3 -10% $15.75 $6,932 4 0% $17.50 $3,463 5 10% $19.25 -$6 6 20% $21.00 -$3,475 7 8 % Deviation NON-VARIABLE COSTS 9 from Fixed NPV O Base Case Costs $3,463 1 -20% 2 3 0% $1,000 $3,463 4 10% 5 20% 6 7 8 9 -0 -1 2 3 4 5 -10% Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example the base case number of units sold in cell B105 should be the number 1000; you should NOT have the formula =D29 in that cell. This is because you'll use D29 as the column input cell in the data table and if Excel tries to iteratively replace cell D29 with the formula =D29 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won't tell you that there is a problem, so you'll just get the wrong values for the data table! Build a Model Sheet2 Sheet1 +