Microsoft has developed a powerful new server that would be used for corporations' Internet activities. It

would cost $$10$ million 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 year's

projected sales; for example, NWC $\_(0)=10\%$ Sales $\_(1)).$

The firm believes it could sell $740$ units per year. The servers would sell for $$25,000$ per unit, and Microsoft

believes that variable costs would amount to $$18,000$ per unit. After Year $1,$ the sales price and variable costs

will increase at the inflation rate of $3\mathrm{.}3\%.$ The company's nonvariable costs would be $$1$ million at Year $1$ and

also would increase at the $3\mathrm{.}3\%$ inflation rate.

The server project would have a life of $4$ years. If the project is undertaken, it must be continued for the

entire $4$ years. The equipment would be depreciated over a $5-$year period, using MACRS rates. The estimated

market value of the equipment at the end of the project's $4-$year life is $$500,000.$

Micosoft's tax rate is $25\%.$ The WACC for projects of this type is believed to be $10\%$ but the CFO is worried

about the precision of the $10\%$ estimate and wants to consider the implications of the WACC being anywhere

from $7\%$ to $13\%.$ The CFO also would like to see sensitivity analysis on sales price, quantity sold, and variable

cost$.$

Base Case

b$.$ Conduct a scenario analysis. Assume that there is a $25\%$ probability that best$-$case conditions, with each of

the following variables being $20\%$ better than its base$-$case value, will occur. There is a $25\%$ probability of

worst$-$case conditions, with the variables $20\%$ worse than base, and a $50\%$ probability of base$-$case conditions.

PLEASE SHOW FORMULAS