(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...


Hello LGR,Can you please help me with a finance problem? I'd like your help. I really liked working with you. Could you please help me?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/

 

10%

 

NPV

 

=

 

First year sales (in units)

 

1,000

 

IRR

 

=

 

Sales price per unit

 

$24.00

 

Payback =

 

Variable cost per unit (excl. dep

 

$17.50

 

Nonvariable costs (excl. depr.)

 

$1,000

 

Market value of equipment at Y

 

$500

 

Tax rate

 

40%

 

WACC

 

10%

 

Inflation in prices and costs

 

3.0%

 

Estimated salvage value at yea

 

$500

 

Intermediate Calculations

 

1

 

2

 

3

 

4

 

Units sold

 

Sales price per unit (excl. depr.)

 

Variable costs per unit (excl. depr.)

 

Nonvariable costs (excl. depr.)

 

Sales revenue

 

Required level of net operating working capital

 

Basis for depreciation

 

$10,000

 

Annual equipment depr. rate

 

20.00%

 

32.00%

 

19.20%

 

11.52%

 

Annual depreciation expense

 

Ending Bk Val: Cost – Accum Dep'rn

 

$10,000

 

Salvage value

 

$500

 

Profit (or loss) on salvage

 

Tax on profit (or loss)

 

Net cash flow due to salvage

 

Years

 

Cash Flow Forecast

 

1

 

2

 

3

 

4

 

Sales revenue

 

Variable costs

 

Nonvariable operating costs

 

Depreciation (equipment)

 

Oper. income before taxes (EBIT)

 

Taxes on operating income (40%)

 

Net operating profit after taxes

 

Add back depreciation

 

Equipment purchases

 

Cash flow due to change in NOWC

 

Net cash flow due to salvage

 

Net Cash Flow (Time line of cash flows)

 

Key Results:

 

Appraisal of the Proposed Project

 

Net Present Value (at 10%) =

 

IRR =

 

MIRR =

 

Payback =

 

Data for Payback

 

Years

 

Years

 

1

 

2

 

3

 

4

 

Net cash flow

 

Cumulative CF

 

Part of year required

 

for payback

 

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%.

 


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