Solution Chapter: Problem: 11 18 Cash Flow Estimation and Risk Analysis Webmasters.com has developed a powerful new server that would be used for corporations' Internet activ would cost $10 million at Year 0 to buy the equipment necessary to manufacture the server. The project net working capital at the beginning of each year in an amount equal to 10% of the year's projected sales; NWC = 10% (Sales). The firm believes it could sell 1,000 units per year. The servers would sell for $24,000 per unit, and Webma believes that variable costs would amount to $18,000 per unit. After Year 1, the sales price and variable co increase at the inflation rate of 3%. The company's nonvariable costs would be $1 million at Year 1 and als increase at the 3% inflation rate. The server project would have a life of 4 years. If the project is undertaken, it must be continued for the er The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market valu equipment at the end of the project's 4-year life is $500,000. Webmasters' federal-plus-state tax rate is 25%. Its cost of capital is 10% for average-risk projects, defir projects with a coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a 8%, and high-risk projects at 13%. Also, the project's returns are expected to be highly correlated with retu firm's other assets. a. Develop a spreadsheet model, and use it to find the project's NPV, IRR, and payback. Input Data (in thousands of dollars) Scenario name Probability of scenario Equipment cost Net operating working capital/Sales First year sales (in units) Base Case Note: the items in red will be used in a scenario analy 50% $10,000 10% 1,000 Key Results: NPV = $2,346 Sales price per unit $24.00 IRR = 17.6% Variable cost per unit (excl. depr.) $18.00 Payback = 3.13 Nonvariable costs (excl. depr.) $1,000 Inflation in prices and costs 3.0% Estimated salvage value at year 4 $500 Depreciation years Year 1 Year 2 Year 3 Year 4 Depreciation rates 20.00% 32.00% 19.20% 11.52% Tax rate WACC for average-risk projects 25% 10% Intermediate Calculations 0 1 2 3 Units sold 1,000 Sales price per unit (excl. depr.) $24.00 1,000 $24.72 1,000 $25.46 $ 18.00 $ 18.54 $ 19.10 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 $ 1,000.00 $ 1,030.00 $ 1,060.90 $ 24,000.00 $24,720.00 $25,461.60 $ 2,400.00 $ 2,472.00 $ 2,546.16 $ 2,622.54 $ 10,000.00 20.00% 32.00% $2,000 $3,200 19.20% $1,920