Webmasters.com has developed a powerful new server that would be used for corporations' Internet activities. It would cost $10 million to buy the equipment necessary to manufacture the server, and it would require net working capital equal to 10% of sales. The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would amount to $17,500 per unit. After the first year, the sales price and variable costs would increase at the inflation rate of 3%. The company's fixed costs would be $1 million per year, and would increase with inflation. It would take one year to buy the required equipment and set up operations, and 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 3 with returns on the firm's other assets. The firm believes it could sell 1,000 units per year. 4 5 The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the 7 equipment at the end of the project's 4-year life is $500,000. Webmasters' federal-plus-state tax rate is 40%. Its cost 8 of capital is 10% for average risk projects, defined as projects with a coefficient of variation for NPV between 0.8 and 9 1.2. Low risk projects are evaluated with a WACC of 8%, and high risk projects at 13%. 20 21 a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. 22 6 A 1.2. Low risk projects are evaluated with a WACC of 8%, and high risk projects at 13%. D 1 a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. 2 to Market value of equipment in 2006 Tax rate WACC Inflation $500 40% 1096 3.096 23 24 25 Part 1. Input Data (in thousands of dollars) 26 27 Equipment cost $10,000 28 Net Operating WC/sales 10% 29 First year sales (in units) 1,000 30 Sales price per unit $24.00 31 Variable cost per unit $17.50 32 Fixed costs $1,000 33 34 Part 2. Depreciation and Amortization Schedule 35 Year Initial Cost 36 37 Equipment Depr'n Rate 38 Equipment Depr'n, Dollars 10,000 39 Ending Bk Val: Cost - Aceum Dep'in 40 41 Part 3. Net Salvage Values, in Year 4 42 Estimated Market Value in Year 4 43 Book Value in Year 4 44 Expected Gain or Loss Year's Accum'd Depr'n DI G 3 4 20.0% S2.000 32.096 $3,200 19.096 $1,900 12.09 $1,200 Equipment A B C D G H E 36 20.096 32.0% 19.09% 12.0% 37 Equipment Depr'n Rate 38 Equipment Depr'n, Dollars 10,000 $2,000 $3,200 $1,900 $1,200 39 Ending Bk Val: Cost - Accum Dep'm 40 41 Part 3. Net Salvage Values, in Year 4 Equipment 42 Estimated Market Value in Year 4 43 Book Value in Year 4 44 Expected Gain or Loss 45 Taxes paid or tax credit 46 Net cash flow from salvage Note: You will get capital loss, not gain! 47 48 Part 4. Projected Net Cash Flows (Time line of annual cash flows) 49 Years 0 50 Investment Ourlays at Time Zero: 51 Equipment (10,000) 52 53 Operating Casle Flows over the Project's Life: 54 Units sold 1.000 55 Sales price $24.00 56 Variable costs 57 $17.50 58 Sales revenue S24.000 60 Fixed operating costs 17.500 61 Depreciation (equipment) Build a Model 59 Variable costs G78 X F G H 1,000 $24.00 $17.50 $24,000 17,500 B D E 53 Operating Cash Flows over the Project's Life: 54 Units sold 55 Sales price 56 Variable costs 57 58 Sales revenue 59 Variable costs 60 Fixed operating costs 61 Depreciation (equipment) 62 Oper income before taxes (EBIT) 63 Taxes on operating income (40%) 64 Net Operating Profit After Taxes (NOPAT) 65 Add back depreciation 66 Operating cash flow 67 68 Terminal Year Cash Flows: 69 Required level of net operating working capital $2,400 70 Required investment in NOWC ($2,400) 71 72 Terminal Tear Cash Flows: 73 Net salvage value 74 75 Net Cash Flow (Time line of cash flows) 76 77 Part 5. Key Output: Appraisal of the Proposed Project 78 SO $2,400 SO SO SO SO SO SO Note: Y Note: Y Note: Yo You must Webmasters.com has developed a powerful new server that would be used for corporations' Internet activities. It would cost $10 million to buy the equipment necessary to manufacture the server, and it would require net working capital equal to 10% of sales. The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would amount to $17,500 per unit. After the first year, the sales price and variable costs would increase at the inflation rate of 3%. The company's fixed costs would be $1 million per year, and would increase with inflation. It would take one year to buy the required equipment and set up operations, and 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 3 with returns on the firm's other assets. The firm believes it could sell 1,000 units per year. 4 5 The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the 7 equipment at the end of the project's 4-year life is $500,000. Webmasters' federal-plus-state tax rate is 40%. Its cost 8 of capital is 10% for average risk projects, defined as projects with a coefficient of variation for NPV between 0.8 and 9 1.2. Low risk projects are evaluated with a WACC of 8%, and high risk projects at 13%. 20 21 a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. 22 6 A 1.2. Low risk projects are evaluated with a WACC of 8%, and high risk projects at 13%. D 1 a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. 2 to Market value of equipment in 2006 Tax rate WACC Inflation $500 40% 1096 3.096 23 24 25 Part 1. Input Data (in thousands of dollars) 26 27 Equipment cost $10,000 28 Net Operating WC/sales 10% 29 First year sales (in units) 1,000 30 Sales price per unit $24.00 31 Variable cost per unit $17.50 32 Fixed costs $1,000 33 34 Part 2. Depreciation and Amortization Schedule 35 Year Initial Cost 36 37 Equipment Depr'n Rate 38 Equipment Depr'n, Dollars 10,000 39 Ending Bk Val: Cost - Aceum Dep'in 40 41 Part 3. Net Salvage Values, in Year 4 42 Estimated Market Value in Year 4 43 Book Value in Year 4 44 Expected Gain or Loss Year's Accum'd Depr'n DI G 3 4 20.0% S2.000 32.096 $3,200 19.096 $1,900 12.09 $1,200 Equipment A B C D G H E 36 20.096 32.0% 19.09% 12.0% 37 Equipment Depr'n Rate 38 Equipment Depr'n, Dollars 10,000 $2,000 $3,200 $1,900 $1,200 39 Ending Bk Val: Cost - Accum Dep'm 40 41 Part 3. Net Salvage Values, in Year 4 Equipment 42 Estimated Market Value in Year 4 43 Book Value in Year 4 44 Expected Gain or Loss 45 Taxes paid or tax credit 46 Net cash flow from salvage Note: You will get capital loss, not gain! 47 48 Part 4. Projected Net Cash Flows (Time line of annual cash flows) 49 Years 0 50 Investment Ourlays at Time Zero: 51 Equipment (10,000) 52 53 Operating Casle Flows over the Project's Life: 54 Units sold 1.000 55 Sales price $24.00 56 Variable costs 57 $17.50 58 Sales revenue S24.000 60 Fixed operating costs 17.500 61 Depreciation (equipment) Build a Model 59 Variable costs G78 X F G H 1,000 $24.00 $17.50 $24,000 17,500 B D E 53 Operating Cash Flows over the Project's Life: 54 Units sold 55 Sales price 56 Variable costs 57 58 Sales revenue 59 Variable costs 60 Fixed operating costs 61 Depreciation (equipment) 62 Oper income before taxes (EBIT) 63 Taxes on operating income (40%) 64 Net Operating Profit After Taxes (NOPAT) 65 Add back depreciation 66 Operating cash flow 67 68 Terminal Year Cash Flows: 69 Required level of net operating working capital $2,400 70 Required investment in NOWC ($2,400) 71 72 Terminal Tear Cash Flows: 73 Net salvage value 74 75 Net Cash Flow (Time line of cash flows) 76 77 Part 5. Key Output: Appraisal of the Proposed Project 78 SO $2,400 SO SO SO SO SO SO Note: Y Note: Y Note: Yo You must