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, NWC0 = 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 companys nonvariable 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 project's returns are expected to be highly correlated with returns on the firm's 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 depreciation rates for a 5-year MACRS asset are: 20%, 32%, 19.20% and 11.52%. 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%.

a. Develop a spreadsheet model, and use it to find the projects NPV, IRR, and payback.

\begin{tabular}{|c|c|c|c|c|c|c|} \hline \multicolumn{2}{|l|}{ Input Data (in thousands of dollars) } & & & & \\ \hline Equipment cost & $10,000 & & Key Results: & & & \\ \hline Net operating working capital/Sales & 10% & & NPV= & & & \\ \hline First year sales (in units) & 1,000 & & IRR = & & & \\ \hline Sales price per unit & $24.00 & & Payback = & & & \\ \hline Variable cost per unit & $17.50 & & & & & \\ \hline Nonvariable costs & $1,000 & & & & & \\ \hline Market value of equipment at Year 4 & $500 & & & & & \\ \hline Tax rate & 40% & & & & & \\ \hline WACC & 10% & & & & & \\ \hline Inflation in prices and costs & 3.0% & & & & & \\ \hline Estimated salvage value at year 4 & $500 & & & & & \\ \hline Intermediate Calculations & & 0 & 1 & 2 & 3 & 4 \\ \hline Units sold & & & & & & \\ \hline Sales price per unit & & & & & & \\ \hline Variable costs per unit & & & & & & \\ \hline Nonvariable costs & & & & & & \\ \hline Sales revenue & & & & & & \\ \hline Required level of net operating worki & capital & & & & & \\ \hline Cash flow due to change in NOWC & & & & & & \\ \hline Basis for depreciation & & & & & & \\ \hline Annual equipment depr. rate & & & & & & \\ \hline Annual depreciation expense & & & & & & \\ \hline Ending Bk Val: Cost - Accum Dep'rn & & & & & & \\ \hline Salvage value & & & & & & \\ \hline Profit (or loss) on salvage & & & & & & \\ \hline Tax on profit (or loss) & & & & & & \\ \hline Net cash flow due to salvage & & & & & & \\ \hline \end{tabular} \begin{tabular}{l} Cash Flow Forecast \\ \hline Sales revenue \\ Variable costs \\ Nonvariable costs \\ Depreciation (equipment) \\ Oper. income before taxes (EBIT) \\ Taxes on operating income (40\%) \\ \hline EBIT (1-T) \\ Add back depreciation \\ Net Operating CF \\ Projected Net Cash Flows \\ Equipment purchases (Initial Investment) \\ \hline Net Operating CF \\ Cash flow due to change in NOWC \\ Net cash flow due to salvage \\ Net Cash Flow (Time line of cash flows) \\ \hline Key Results: Appraisal of the Proposed Project \\ \hline Net Present Value (at 10\%) = \\ \hline IRR = \\ \hline MIRR = \\ \hline Payback = \\ \hline Data for Payback Years \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|c|} \hline \multicolumn{2}{|l|}{ Input Data (in thousands of dollars) } & & & & \\ \hline Equipment cost & $10,000 & & Key Results: & & & \\ \hline Net operating working capital/Sales & 10% & & NPV= & & & \\ \hline First year sales (in units) & 1,000 & & IRR = & & & \\ \hline Sales price per unit & $24.00 & & Payback = & & & \\ \hline Variable cost per unit & $17.50 & & & & & \\ \hline Nonvariable costs & $1,000 & & & & & \\ \hline Market value of equipment at Year 4 & $500 & & & & & \\ \hline Tax rate & 40% & & & & & \\ \hline WACC & 10% & & & & & \\ \hline Inflation in prices and costs & 3.0% & & & & & \\ \hline Estimated salvage value at year 4 & $500 & & & & & \\ \hline Intermediate Calculations & & 0 & 1 & 2 & 3 & 4 \\ \hline Units sold & & & & & & \\ \hline Sales price per unit & & & & & & \\ \hline Variable costs per unit & & & & & & \\ \hline Nonvariable costs & & & & & & \\ \hline Sales revenue & & & & & & \\ \hline Required level of net operating worki & capital & & & & & \\ \hline Cash flow due to change in NOWC & & & & & & \\ \hline Basis for depreciation & & & & & & \\ \hline Annual equipment depr. rate & & & & & & \\ \hline Annual depreciation expense & & & & & & \\ \hline Ending Bk Val: Cost - Accum Dep'rn & & & & & & \\ \hline Salvage value & & & & & & \\ \hline Profit (or loss) on salvage & & & & & & \\ \hline Tax on profit (or loss) & & & & & & \\ \hline Net cash flow due to salvage & & & & & & \\ \hline \end{tabular} \begin{tabular}{l} Cash Flow Forecast \\ \hline Sales revenue \\ Variable costs \\ Nonvariable costs \\ Depreciation (equipment) \\ Oper. income before taxes (EBIT) \\ Taxes on operating income (40\%) \\ \hline EBIT (1-T) \\ Add back depreciation \\ Net Operating CF \\ Projected Net Cash Flows \\ Equipment purchases (Initial Investment) \\ \hline Net Operating CF \\ Cash flow due to change in NOWC \\ Net cash flow due to salvage \\ Net Cash Flow (Time line of cash flows) \\ \hline Key Results: Appraisal of the Proposed Project \\ \hline Net Present Value (at 10\%) = \\ \hline IRR = \\ \hline MIRR = \\ \hline Payback = \\ \hline Data for Payback Years \\ \hline \end{tabular}