FuncoLand has developed an efficient, new cloud server that 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 = (11%)(Salest+1) B) Calculate the net cash flow due to salvage. (12 Points) a. Annual depreciation expense = (Basis for depreciation) (Annual depreciation rate) b. Ending Book Value = Previous book value Current annual depreciation expense c. Profit (or loss) on salvage = Salvage value Ending book value d. Tax on profit (or loss) = Profit (or loss) on salvage * Tax rate e. Net cash flow due to salvage = Salvage value Tax on profit (or loss) C) Calculate net cash flows for each year. (12 Points) a. EBIT = Sales revenues Variable costs Nonvariable costs Depreciation b. Cash flow due to change in NOWCt = NOWCt-1 NOWCt c. Net cash flow = NOPAT + Depreciation + Equipment Purchase + Cash flow due to change in NOWC + Net cash flow due to salvage Part 2: Capital Budgeting Analysis D) Calculate the NPV, IRR, MIRR (using Excel function, and the Payback and Discounted Payback using formulas (12 Points) a. NPV Excel function b. IRR c. MIRR Part 3: Risk Analysis E) Use the Excel What-IF Analysis to conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price. Set the variables values at 25% and 50% above and below their base-case values. Include a graph in your analysis of the NPV on the y-axis and the percent deviation from base on the x-axis. Label the graph title and axes. (12 Points)