THE CASE STUDY CONSISTS OF THREE SECTIONS (SECTION 1, 2 & 3). Suppose you are the Chief Financial Officer (CFO) of Xero Limited (XRO.AX). Recently, XRO is planning to establish a cloud-based hyperscale data centre for medical insurance companies. Building such data centre would require a large investment from XRO. As a result, the development of this new data centre will initially require a capital expenditure equal to 25% of the "Total cash" for the fiscal year ended 31 March 2022 (i.e., t = 0). This new data centre is expected to have a useful life of eight years. Both the estimated and actual salvage values are assumed to be zero (i.e., to protect the insurance policyholders' privacy, this data centre will be demolished at the end of its useful life. Hence, the actual salvage value will be zero). First-year cash revenue from this data centre is expected to be 5% of the "Total Revenue" for XRO's fiscal year ended 31 March 2022. The growth rate of data centre's cash revenue is expected to be as below Year Growth Rate 2-4 20% 5 -6 10% 7 -8 5% For simplicity, the change in working assets due to carrying out this project is deemed to be offset by the corresponding change in working liabilities. Your role in this project is to determine the cash flows associated with this data centre and help CEO make investment decisions.Section 1: Complete this section using Excel and report your answers in a Word document. For calculation purposes, assume you are on 1 April 2022. 1. Determine the incremental cash flow ofthe new project Set up the computation of the incremental cash ows in separate, contiguous columns for each year of the data centre's life in Excel. Be sure to make outows negative and inows positive. a. Determine the annual cash revenue for each year. The CEO of XRO has informed you that the gross prot margin is deemed to be the same as XRO's other outstanding projects (i.e., 'Gross prot' divided by \"Total revenue\"). (1 mark) b. Determine the annual depreciation tax shield if XRO depreciates the data centre using the straight-line method. c. Assuming that XRO's effective tax rate is 30%, determine the incremental cash ows of each year. For simplicity, assume that the tax credit cannot be carried forward and XRO does not have any existing tax liabilities. 2. Determine the internal rate of return Use Excel function to work out the internal rate of return for this new m Section 2: Complete this section using Excel and report your answers in a Word document. 1. Determine the weighted average cost of capital (WACC) a. Using XRO daily stock price, All Ordinaries index daily closing price and risk-free yield (3 1i'3i'201'}r 31i'3f2022, as attached) that are provided in the spreadsheet to estimate CAPM {3' using regression method. Present the graph with the best tting line and a regression output table in your Excel spreadsheet. Calculate the cost of equity using CAPM. (You can make _ret:e_rp_n_ce to reliable sources, such as mainstream financial media and reputable institutions, for market risk premium and risk-free rate. These inputs can be as of either now or 31 March 2022.) b. Estimate the cost of debt by dividing the company's \"Interest Expense\" by the \"Long-term Debt\" as of 31 March 2022. You may assume this cost of debt applies to this XRO's new investment. IQ c. Calculate the weighted average cost of capital (i.e., note that you should use the closing share price on 31 March 2022 to calculate the equity weight). You can assume the financing of the data centre's capital expenditure is in line with the XRO's current capital structure. The ongoing cash outows on expenses can be covered by the ongoing cash inows, and thus no additional financing is required. 2. Calculate the NPV for this project. Use Excel function to work out the NPV for this new project. 3. Sensitivity analysis a. Gross cash profit margin Compute the NPV of the project using below gross profit margins. Gross Profit Margin NPV 50% 65% 80% What is the 'breakeven' gross profit margin (i.e., NPV = 0)? b. Interest tax shield Determine the present value of interest tax shield if XRO increases its level of debt, measured by Debt-to-Equity ratio (D/E), with a span of 15%. The additional debt is to substitute the outstanding equity (i.e., share buyback). Your starting point should be the current level of debt that XRO adopts. Suppose XRO has a policy that Debt-to-Equity ratio is capped at 100%. Debt level (D/E) PV of Interest Tax Shield Current D/E Current D/E + 15% Current D/E + 30% ... (D/E