(Solution) 12/7/2012 Chapter: Problem: 11 18 Webmasters.com Has Developed A Powerful New Server That Would Be Used For Corporations' Internet Activities. It... | Snapessays.com


(Solution) 12/7/2012 Chapter: Problem: 11 18 Webmasters.com has developed a powerful new server that would be used for corporations' Internet activities. It...


I am having problems with section b. line 84-102 on a spreadsheet.  I am not able to figure out how to use the data and create a table.  Please give me the steps.  I need to understand for a test.  I seem to be missing a step but not sure what.  Step by step info would be appreciated.12/7/2012

 

Chapter:

 

11

 

Problem:

 

18

 

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

 

$10,000

 

Key Results:

 

Net operating working capital/Sales

 

10%

 

NPV

 

=

 

First year sales (in units)

 

1,000

 

IRR

 

=

 

Sales price per unit

 

$24.00

 

Payback =

 

Variable cost per unit (excl. depr.)

 

$17.50

 

Nonvariable costs (excl. depr.)

 

$1,000

 

Market value of equipment at Year 4

 

$500

 

Tax rate

 

40%

 

WACC

 

10%

 

Inflation in prices and costs

 

3.0%

 

Estimated salvage value at year 4

 

$500

 

Intermediate Calculations

 

1

 

2

 

3

 

4

 

Units sold

 

1,000

 

1,000

 

1,000

 

1,000

 

Sales price per unit (excl. depr.)

 

$24.00

 

$24.72

 

$25.46

 

$26.23

 

Variable costs per unit (excl. depr.)

 

$17.50

 

$18.03

 

$18.57

 

$19.12

 

Nonvariable costs (excl. depr.)

 

1,000

 

$1,030.00

 

$1,060.90

 

$1,092.73

 

Sales revenue

 

$24,000

 

$24,720

 

$25,462

 

$26,225

 

Required level of net operating working capital

 

$2,400

 

$2,472

 

$2,546

 

$2,623

 

$0.00

 

Basis for depreciation

 

$10,000

 

Annual equipment depr. rate

 

20.00%

 

32.00%

 

19.20%

 

11.52%

 

Annual depreciation expense

 

$2,000

 

$3,200

 

$1,920

 

$1,152

 

Ending Bk Val: Cost – Accum Dep'rn

 

$10,000

 

$8,000

 

$4,800

 

$2,880

 

$1,728

 

Salvage value

 

$500

 

Profit (or loss) on salvage

 

-$1,228

 

Tax on profit (or loss)

 

-$491.20

 

Net cash flow due to salvage

 

$991.20

 

Years

 

Cash Flow Forecast

 

1

 

2

 

3

 

4

 

Sales revenue

 

$24,000

 

$24,720

 

$25,462

 

$26,225

 

Variable costs

 

17,500

 

18,025

 

18,566

 

19,123

 

Nonvariable operating costs

 

1,000

 

1,030

 

1,061

 

1,093

 

Depreciation (equipment)

 

2,000

 

3,200

 

1,920

 

1,152

 

Oper. income before taxes (EBIT)

 

$3,500

 

$2,465

 

$3,915

 

$4,858

 

Taxes on operating income (40%)

 

1,400

 

986

 

1,566

 

1,943

 

Net operating profit after taxes

 

$2,100

 

$1,479

 

$2,349

 

$2,915

 

Add back depreciation

 

2,000

 

3,200

 

1,920

 

1,152

 

Equipment purchases

 

-$10,000

 

Cash flow due to change in NOWC

 

-$2,400

 

-$72

 

-$74

 

-$76

 

$2,623

 

Net cash flow due to salvage

 

$991

 

Net Cash Flow (Time line of cash flows)

 

-$12,400

 

$4,028

 

$4,605

 

$4,193

 

$7,681

 

Key Results:

 

Appraisal of the Proposed Project

 

Net Present Value (at 10%) =

 

$3,463

 

IRR =

 

21.09%

 

MIRR =

 

16.99%

 

Payback =

 

Data for Payback

 

Years

 

Years

 

1

 

2

 

3

 

4

 

Net cash flow

 

-$12,400

 

$4,028

 

$4,605

 

$4,193

 

$7,681

 

Cumulative CF

 

-$12,400

 

-$8,372

 

-$3,767

 

$425

 

$8,106

 

Part of year required

 

for payback

 

% Deviation

 

SALES PRICE

 

from

 

Base

 

NPV

 

Base Case

 

a

 

$3,463

 

-20%

 

$19.20

 

-10%

 

$21.60

 

0%

 

$24.00

 

10%

 

$26.40

 

20%

 

$28.80

 

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, NWC

 

= 10%(Sales

 

1

 

).

 

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%.

 

b.

 

Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable

 

costs per unit, and number of units sold.

 

Set these variables’ values at 10% and 20% above and below their base-

 

case values. Include a graph in your analysis.

 

Note about data tables.

 

The data in the column input should

 

NOT be input using a cell reference to the column input cell.

 

For example, the base case Sales Price in Cell B86 should be

 

the number $24.00 you should NOT have the formula =D28 in

 

that cell.

 

This is because you'll use D28 as the column input

 

cell in the data table and if Excel tries to iteratively replace Cell

 

D28 with the formula =D28 rather than a series of numbers,

 

Excel will calculate the wrong answer.

 

Unfortunately, Excel

 

won't tell you that there is a problem, so you'll just get the

 

wrong values for the data table!

 


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