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 10% of the years projected sales; for example, NWC0 = 10% (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 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 1,000 units per year. The equipment would be depreciated over a 5-year period, using MACRS rates (see page 500). The estimated market value of the equipment at the end of the projects 4-year life is $500,000. FuncoLands federal-plus-state tax rate is 30%. Its cost of capital is 10%.

Cash Flow Estimation

A) Fill in the input data for the model.

Equipment Cost
Net Operating Working capital/sales
First year sales (in units)
Sales price per unit
Varible cost per unit (excel. depr.)
Nonvariable cost (excl. depr.)
Market value of equipment at year 4
Tax rate
Wacc
Inflation in price and costs

B) Calculate the sales revenues for each year.

Year	0	1	2	3	4
Units sold
Sales price per unit (excl. depr.)
Variable costs per unit (excl. depr.)
Nonvariable costs (excl. depr.)
variable costs
Sales revenue
Net Operating Working Capital

C) Calculate the net cash flow due to salvage.

Year	0	1	2	3	4
Basis for depreciation
Annual equipment depr. rate
Annual depreciation expense
Ending Bk Val: Cost - Accum Dep
Salvage value
Profir (or loss) on salvage
Tax on profit (or loss)
Net cash flow due to salvage

D) Calculate net cash flows for each year.

Years	0	1	2	3	4
Sales revenue (per 1000 units)
Variable costs (per 1000 units)
Nonvariable operating costs
Depreciation (equipment)
Oper. income before tax (EBIT)
Taxes on operating Income (30%)
Net operating profit after taxes
add back depreciation
Equippment purchases
Cash flow due to change in NOWC
Net cash flow due to salvage
Net Cash Flow