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Scenario: Webmasters.com has developed a powerful new se e! Olat would be use for corporations' Internet activities. It would cost $10 million at Year 0 to buy the equipment necessat8 Inanufacture the server. The project would require net working capital at the beginning of each year in an amount equal 0 10% of the year's projected sales; for example, NWCO = The servers would sell for $24,000 per unit, and Webmasters believes thatyarabje costs would amount to $17,500 per unite After Year 1, the sales price and variable costs will Increase, at the inflatlon ra f 30/06 The company's nonvariable costs would be $1 million at Year 1 and would increase with inflation, The server project would have a life of4 years! i lithe project is un e a e y 1 must be continued for the entire 4 years. Also, the project's returns are expected to be highly correlatedvitfi returns' firmi other assets. The firm believes it could sell 1,000 units per year. The equipment would be depreciated oyef4 5-year peno usmgM fra es l!fiThe est1matednarketN@lue of the equipment at the end of the project's 4-year life is $500 000 Webmasters' ederaiLplu-siaie tax rate iS 4000 and Its overall weighted average cost of capital is 10%. 1. Define "incremental cash flo as f1Jw? hen calcu atln r enseo dl 1 en Should you subtract In e e o Suppose the firm ha pen 0 0 as in the analysis? Explain o Now assume that the plant spac in the analysis? If so, how? d c Ion ling site. Should this be included $25,000 a year. Should this be included ease sales of the firm's other lines by$50,000 per o Finally, assume that the new prody 1 year. Should this be considered iniKieOfl 2. Construct annual incremental operating cash flo 3. Estimate the required net operatmg working caplta working capital. 4. Calculate the after-tax salvage cash flow. cash flow due to investments in net operating e r, an 5. Calculate the net cash flows for each year. Based on these cash ere the project's NPV, IRRy MIRR, and payback? Do these indicators suggest that the project should be 6. What does the term "risk" mean in the context of capital budgeting, to whal extent can risk be quantified, and when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates? o What are the three types of risk that are relevant in capital budgeting? o How is each of these risk types measured? and how do they relate to one another? o How is each type of risk used in the capital budgeting process? 7. What is sensitivity analysis? o Perform sensitivity analysis on the unit sales, salvage value, and cost oceapital 'for the project. Assume that each of these variables can vary from its base case? oc expected, value by plus and minus 10, 20, and 30 percent, Include a sensitivity diagram, and discuss the results.