5 Webmasters.com has developed a powerful new server that would be used for corporations' Internet activities. It 6 would cost $10 million at Year 0 to buy the equipment necessary to manufacture the server. The project would 7 require net working capital at the beginning of each year in an amount equal to 10% of the year's projected sales; 8 for example, NWC, = 10%(Sales). The servers would sell for $24,000 per unit, and Webmasters believes that 9 variable costs would amount to $17,500 per unit. After Year 1, the sales price and variable costs will increase at the 10 inflation rate of 3%. The company's nonvariable costs would be $1 million at Year 1 and would increase with 11 inflation. 12 13 The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 14 years. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The 15 firm believes it could sell 1,000 units per year. 16 17 18 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 19 cost of capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 20 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%. 0 2 3 4 53 Cash Flow Forecast 54 Sales revenue 55 Variable costs 56 Nonvariable operating costs 57 Depreciation (equipment) 58 Oper. income before taxes (EBIT) 59 Taxes on operating income (40%) 60 Net operating profit after taxes 61 Add back depreciation 62 Equipment purchases 63 Cash flow due to change in NOWC 64 Net cash flow due to salvage 65 Net Cash Flow (Time line of cash flows)