FuncoLand has developed an efficient, new cloud server that it can sell to other corporations to boost online operations and stability. For FuncoLand, it would cost $10,000,000 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 11% of the next years projected sales; for example, NWC0 = 11% (Sales1). The servers would sell for $24,000 per unit, and specialists estimate 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 companys nonvariable costs would be $1,000,000 (per 1,000 units) at Year 1 and would increase at the inflation rate each year thereafter. 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 a constant 1,000 units per year. The equipment would be depreciated over a 4-year period, using MACRS rates as shown below:

Year	Rate
1	20.00%
2	32.00%
3	19.20%
4	11.52%
5	11.52%
6	5.76%

The estimated market value of the equipment at the end of the projects 4-year life is $2,500,000. FuncoLands federal-plus-state tax rate is 30%. Its cost of capital is 10%.

Part 1: Cash Flow Estimation

A) Calculate the sales revenues for each year. (12 Points)

a. Note the units sold are constant each year

b. The sales price, variable cost, and nonvariable cost increase each year by the inflation rate

c. NOWCt

B) Calculate the net cash flow due to salvage. (12 Points)

a. Annual depreciation expense

b. Ending Book Value

c. Profit (or loss) on salvage

d. Tax on profit (or loss)

e. Net cash flow due to salvage

C) Calculate net cash flows for each year. (12 Points)

a. EBIT

b. Cash flow due to change in NOWCt

c. Net cash flow

Part 2: Capital Budgeting Analysis

D) Calculate the NPV, IRR, MIRR (using Excel function, and the Payback and Discounted Payback using formulas (12 Points)