could anyone please assist with the problem below. A well known university in Maryland works on a new LMS system, The management anticipates that new system will have the first year revenues of $400,000 with subsequent annual growth of 5%. Operating costs are 30% of revenues. The project requires investment in new equipment, which will have a five year anticipated life and will be depreciated using MACRS depreciation method toward a zero book value (MACRS depreciation rates are given below). However, the company will be able to sell the equipment on the after-market at the end of year 5 for 20% of its original cost. The company requires a 10% rate of return from its investment and faces a 38% tax rate (overall the company is profitable). In addition to capital investment, the project requires an outlay of net working capital equal to 10% of revenues in the coming year. I.e., at time 0 (beginning of year 1) net working capital requirement is $25,000 and will grow in subsequent years. All NWC will be recovered after the project's end. a) Calculate the NPV and IRR for the project. Should the company undertake the project? b) The manager raised some concerns about costs, first year revenues and revenue growth projections. Considering one factor at a time, at what level of operating costs, initial revenues, and revenues growth the project will break-even (NPV=0)? c) Looking at percentage difference between the predicted level and critical (break-even) level of each of the three factors, which of them is the most critical? Given MACRS Depreciation: Investment cost (today) $(1,100,000) Year 1 33.33% Project Life 5 years Year 2 44.45% Net Working Capital 10% of revenues Year 3 14.81% Year 1 revenues $400,000 Year 4 7.41% Operating costs 30% of revenues After-market value 20% of initial investment Revenue annual growth 5% Required rate of return 10% Tax rate 38% Solution Year Cash flow estimation 0 1 2 3 4 5 Investment $(1,100,000) Revenues Operating costs EBITDA Less: Depreciation Incremental EBIT Less: Taxes NOPAT Plus: Depreciation Change in NWC Cash from Asset Sale FFCF NPV IRR Analysis NPV is negative - reject the project The manager raised some concerns about costs, first year revenues and revenue growth projections. Considering one factor at a time, at what level of operating costs, initial revenues, and revenues growth the project will break-even (NPV=0)? (see chapter 3 for details) Base case Break-even Operating costs (% of revenues) 30.00% Year 1 revenues $400,000 Revenues growth 5.00% Cash flow estimation 0 1 2 3 4 5 Investment $(1,100,000) Revenues Operating costs EBITDA Less: Depreciation Incremental EBIT Less: Taxes NOPAT Plus: Depreciation Change in NWC Cash from Asset Sale FFCF NPV IRR Looking at percentage difference between the predicted level and critical (break-even) level of each of the three factors, which of them is the most critical? Base case Break-even Difference (%) Operating costs (% of revenues) 30.00% Year 1 revenues $400,000 Revenues growth 5.00% Your answer. Please refer to the attached excel document. Thank you,

PROBLEM 2 A well known university in Maryland works on a new LMS system, The management anticipates that new system will have the first year revenues of $400,000 with subsequent annual growth of 5%. Operating costs are 30% of revenues. The project requires investment in new equipment, which will have a five year anticipated life and will be depreciated using MACRS depreciation method toward a zero book value (MACRS depreciation rates are given below). However, the company will be able to sell the equipment on the after-market at the end of year 5 for 20% of its original cost. The company requires a 10% rate of return from its investment and faces a 38% tax rate (overall the company is profitable). In addition to capital investment, the project requires an outlay of net working capital equal to 10% of revenues in the coming year. I.e., at time 0 (beginning of year 1) net working capital requirement is $25,000 and will grow in subsequent years. All NWC will be recovered after the project's end. a) Calculate the NPV and IRR for the project. Should the company undertake the project? (see chapter 2 for details) b) The manager raised some concerns about costs, first year revenues and revenue growth projections. Considering one factor at a time, at what level of operating costs, initial revenues, and revenues growth the project will break-even (NPV=0)? (see chapter 3 for details) c) Looking at percentage difference between the predicted level and critical (break-even) level of each of the three factors, which of them is the most critical? (see chapter 3 for details) Investment cost (today) Project Life Net Working Capital Year 1 revenues Operating costs After-market value Revenue annual growth Required rate of return Tax rate MACRS Depreciation: Year 1 33.33% Year 2 44.45% Year 3 14.81% Year 4 7.41% Given $(1,100,000) 5 years 10% of revenues $400,000 30% of revenues 20% of initial investment 5% 10% 38% Solution a. Year Cash flow estimation Investment Revenues Operating costs EBITDA Less: Depreciation Incremental EBIT Less: Taxes NOPAT Plus: Depreciation Change in NWC Cash from Asset Sale FFCF NPV IRR Analysis 0 $(1,100,000) 1 2 3 4 5 NPV is negative - reject the project The manager raised some concerns about costs, first year revenues and revenue growth projections. Considering one factor at a b. time, at what level of operating costs, initial revenues, and revenues growth the project will break-even (NPV=0)? (see chapter 3 for details) Operating costs (% of revenues) Year 1 revenues Revenues growth Cash flow estimation Investment Revenues Operating costs EBITDA Less: Depreciation Incremental EBIT Less: Taxes NOPAT Plus: Depreciation Change in NWC Cash from Asset Sale FFCF Base case Break-even 30.00% $400,000 5.00% 0 $(1,100,000) 1 Using Goal Seek 2 3 4 5 NPV IRR c. Looking at percentage difference between the predicted level and critical (break-even) level of each of the three factors, which of them is the most critical? Operating costs (% of revenues) Year 1 revenues Revenues growth Your answer. Base case Break-even 30.00% $400,000 5.00% Difference (%) Solution Legend Value given in problem Formula/Calculation/Analysis required Qualitative analysis or Short answer required Goal Seek or Solver cell