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. (please show formulas)

Key Results: NPV - IRR - Payback 0 1 2 3 4 24 25 Input Data in thousands of dollars) 26 Equipment cost $10,000 27 Net operating working capital/Sales 10% 28 First year sales (in units) 1.000 29 Sales price per unit $24.00 30 Variable cost per unit $17.50 31 Nonvariable costs $1,000 32 Market value of equipment at Year 4 $500 33 Tax rate 40% 34 WACC 10% 35 Inflation in prices and costs 3.0% 36 Estimated salvage value at year 4 $500 37 38 Intermediate Calculations 39 Units sold 40 Sales price per unit 41 Variable costs per unit 42 Nonvariable costs 43 Sales revenue 44 Required level of net operating working capital 45 Cash flow due to change in NOWC 46 Basis for depreciation 47 Annual equipment depr. rate 48 Annual depreciation expense 49 Ending Bk Val: Cost - Accum Depirn 50 Salvage value 51 Profit (or loss) on salvage 52 Tax on profit (or loss) 53 Net cash flow due to salvage 54 55 Cash Flow Forecast 56 Sales revenue 57 Variable costs 58 Nonvariable costs 59 Depreciation (equipment) 60 Oper. income before taxes (EBIT) 61 Taxes on operating income (40%) 62 EBIT (1-T) 63 Add back depreciation 64 Net Operating CF 65 Projected Net Cash Flows 66 Equipment purchases (Initial Investment) 67 Net Operating CF 68 Cash flow due to change in NOWC 69 Net cash flow due to salvage 70 Net Cash Flow (Time line of cash flows) 71 72 Key Results: Appraisal of the Proposed Project 73 74 Net Present Value (at 10%) - 75 IRR = 76 MIRR = 77 Payback - 78 79 Data for Payback Years 80 81 Net cash flow 82 Cumulative CF 83 Part of year required for payback Key Results: NPV - IRR - Payback 0 1 2 3 4 24 25 Input Data in thousands of dollars) 26 Equipment cost $10,000 27 Net operating working capital/Sales 10% 28 First year sales (in units) 1.000 29 Sales price per unit $24.00 30 Variable cost per unit $17.50 31 Nonvariable costs $1,000 32 Market value of equipment at Year 4 $500 33 Tax rate 40% 34 WACC 10% 35 Inflation in prices and costs 3.0% 36 Estimated salvage value at year 4 $500 37 38 Intermediate Calculations 39 Units sold 40 Sales price per unit 41 Variable costs per unit 42 Nonvariable costs 43 Sales revenue 44 Required level of net operating working capital 45 Cash flow due to change in NOWC 46 Basis for depreciation 47 Annual equipment depr. rate 48 Annual depreciation expense 49 Ending Bk Val: Cost - Accum Depirn 50 Salvage value 51 Profit (or loss) on salvage 52 Tax on profit (or loss) 53 Net cash flow due to salvage 54 55 Cash Flow Forecast 56 Sales revenue 57 Variable costs 58 Nonvariable costs 59 Depreciation (equipment) 60 Oper. income before taxes (EBIT) 61 Taxes on operating income (40%) 62 EBIT (1-T) 63 Add back depreciation 64 Net Operating CF 65 Projected Net Cash Flows 66 Equipment purchases (Initial Investment) 67 Net Operating CF 68 Cash flow due to change in NOWC 69 Net cash flow due to salvage 70 Net Cash Flow (Time line of cash flows) 71 72 Key Results: Appraisal of the Proposed Project 73 74 Net Present Value (at 10%) - 75 IRR = 76 MIRR = 77 Payback - 78 79 Data for Payback Years 80 81 Net cash flow 82 Cumulative CF 83 Part of year required for payback