Solved by verified expert :OFF STAT
CHAP
11 PROB 18 TEMPLATE
OFF STAT
21/06/2014
Chapter:
11
Problem:
18
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 company’s 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 estimated market value of the equipment
at the end of the project’s 4-year life is $500,000. Webmasters’ federal-plus-state tax rate is
40%. Its cost of capital is 10% for
average-risk projects, defined as projects with a coefficient of variation of
NPV between 0.8 and 1.2. Low-risk
projects are evaluated with a WACC of 8%, and high-risk projects at 13%.
a. Develop a spreadsheet
model, and use it to find the project’s NPV, IRR, and payback.
Input
Data (in thousands of dollars)
Equipment cost
Key Results:
Net operating working capital/Sales
NPV =
$0
First year sales (in units)
IRR =
#NUM!
Sales
price per unit
Payback =
0.00
Variable cost per unit (excl. depr.)
Nonvariable costs (excl. depr.)
Market value of equipment at Year 4
Tax rate
WACC
Inflation in prices and costs
Estimated salvage value at year 4
Intermediate
Calculations
0
1
2
3
4
Units sold
0
0
0
0
Sales
price per unit (excl. depr.)
$0.00
$0.00
$0.00
$0.00
Variable
costs per unit (excl. depr.)
$0.00
$0.00
$0.00
$0.00
Nonvariable
costs (excl. depr.)
0
0
0
0
Sales
revenue
$0
$0
$0
$0
Required
level of net operating working capital
$0
$0
$0
$0
$0
Basis
for depreciation
$0
Annual equipment depr. rate
Annual depreciation expense
$0
$0
$0
$0
Ending
Bk Val: Cost – Accum Dep’rn
$0
$0
$0
$0
$0
Salvage
value
$0
Profit
(or loss) on salvage
$0
Tax
on profit (or loss)
$0
Net
cash flow due to salvage
$0
Years
Cash
Flow Forecast
0
1
2
3
4
Sales
revenue
$0
$0
$0
$0
Variable
costs
0
0
0
0
Nonvariable
operating costs
0
0
0
0
Depreciation
(equipment)
0
0
0
0
Oper.
income before taxes (EBIT)
$0
$0
$0
$0
Taxes
on operating income (40%)
0
0
0
0
Net
operating profit after taxes
$0
$0
$0
$0
Add
back depreciation
0
0
0
0
Equipment
purchases
$0
Cash
flow due to change in NOWC
$0
$0
$0
$0
$0
Net
cash flow due to salvage
$0
Net
Cash Flow (Time line of cash flows)
$0
$0
$0
$0
$0
Key
Results: Appraisal of the Proposed
Project
Net
Present Value (at 10%) =
$0
IRR =
#NUM!
MIRR =
#DIV/0!
Payback =
0.00
Data
for Payback Years
Years
0
1
2
3
4
Net cash flow
$0
$0
$0
$0
$0
Cumulative CF
$0
$0
$0
$0
$0
Part of year required
for payback
0.00
0.00
0.00
0.00
