Excel Project

Webmasters.com has developed a powerful new server that would be used for corporations Internet activities. It would cost $11 million to buy the equipment necessary to manufacture the server, and it would require net operating working capital equal to $2.2 million. The servers would sell for $21,500 per unit, and Webmasters believes that variable costs would amount to $16,500 per unit. After the first year, the sales price and variable costs would increase at the inflation rate of 3%. The companys fixed costs would be $0.8 million per year, and would increase with inflation. It would take one year to buy the required equipment and set up operations, and 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 projects returns are expected to be highly correlated with returns on the firms other assets. The firm believes it could sell 1,500 units per year.

The equipment would be depreciated over a 7-year period, using MACRS rates. The estimated market value of the equipment at the end of the projects 4-year life is $1million. Webmasters federal-plus-state tax rate is 40%. Its cost of capital is 11% for average risk projects.

a. Develop a spreadsheet model and use it to find the projects NPV, IRR, and payback.

Key Output:

NPV =

Part 1. Input Data (in thousands of dollars)

IRR =

MIRR =

Equipment cost

NOWC needed

Market value of equipment in Year 4

First year sales (in units)

Tax rate

Sales price per unit

WACC

Variable cost per unit

Inflation

Fixed costs

Part 2. Depreciation and Amortization Schedule

Years

Accum'd

Year

Initial Cost

1

2

3

4

Depr'n

Equipment Depr'n Rate

Equipment Depr'n, Dollars

Ending Bk Val: Cost - Accum Dep'rn

Part 3. Net Salvage Values, in Year 4

Equipment

Estimated Market Value in Year 4

Book Value in Year 4

Expected Gain or Loss

Taxes paid or tax credit

Net cash flow from salvage

Part 4. Projected Net Cash Flows (Time line of annual cash flows)

Years

0

1

2

3

4

Investment Outlays at Time Zero:

Equipment

NOWC needed

Operating Cash Flows over the Project's Life:

Units sold

Sales price per unit

Variable costs per unit

Sales revenue

Variable costs

Fixed operating costs

Depreciation (equipment)

Oper. income before taxes (EBIT)

Taxes on operating income (40%)

Net Operating Profit After Taxes (NOPAT)

Add back depreciation

Operating cash flow

Terminal Year Cash Flows:

Recovery of NOWC

Terminal Year Cash Flows:

Net salvage value

Net Cash Flow (Time line of cash flows)

Part 5. Key Output: Appraisal of the Proposed Project

Net Present Value

IRR

MIRR

Payback (See calculation below)

Data for Payback Years

0

1

2

3

4

Cumulative CF from Row 75

IF Function to find payback