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Solution ..3/4/2020 Chapter:. Cash Flow Estimation and Risk Analysis Problem: Webmasters.com has developed a powerful new server that would be used for corporations' Internet activities. It d cost $10 million at Year 0 to buy the e ecessary to manufa require net working capital at the beginning of each year in an amount equal to 10% of the year's projected sales for example, NWCo - 10%(Sales!). The firm believes it could sell 1,000 units per year. The servers would sell for $24,000 per unit, and Webmasters 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%. The company's nonvariable costs would be $1 million at Year 1 and also would increase at the 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. Webmasters' federal-plus-state tax rate is 25%. Its cost of capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. Low-risk p 2 . Low-risk projects are evaluated with a WAC 8%, and high-risk projects at 13%. Also, the project's returns are expected to be highly correlated with returns on he firm's other assets.. a.Develop a spreadsheet model, and use it to find the project's NPV. IRR, and payback. Input Data (in thousands of dollars) Probability of sce Note: the items in red will be used in a scenario analysis.. Equipment cost 0,000 Net operating working capital/Sales hey Results: Sales price new units) Variable cost per unit (excl. depr.) Payback = Nonvariable costs (excl. depr.) prices and costs 3.0% Estimated salvage value at year 4 Year 1 Year 2 Year 3 Depreciation rates Year 4 32.00% 19.20% 11.52% WACC for average-risk projects intermediate Calculations Sales price per unit (excl. depr.) Variable costs per unit (excl. depr.) Nonvariable costs (excl. depr.) Sales revenue. Required level of net operating working capital Basis for depreciation Annual equipment depr. 20.00% 32.00% 19.20% 11.52% Annual depreciation expense Ending Bk Val: Cost - Accum Dep'rn Salvage value Profit (or loss) on salvage Tax on profit (or loss) Net cash flow due to salvage Cash Flow Forecast Sales revenue Variable costs Nonvariable operating costs Depreciation (equipment) income before taxes (EBIT) rating income Net operating profit after taxes Equipment purchases Cash flow due to change in N " due to salvage Net Cash Flow (Time line of cash flows Key Results: Appraisal of the Proposed Project Net Present Value (at 10%) Payback=. Discounted Payback = Data for Payback Years Net cash flow Cumulative CF Part of year required for payback ata for Discounted Payback Years Years .Net cash flow Part of year required for discounted payback D. Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price , variable costs per unit, and number of units sold. Set these variables' values at 10% and 20% above and below their base- case values. Include a graph in your analysis. % Deviation| 1st YEAR UNIT SALES from Base Case 1,090 NPV NOT be inputssamplestothe data in the column input should For example, the base case 1st Year Unit Sales in Cell B100 -20% should be the number 1,000 and NOT have the formula -10% cell in the data table and it Excel tries to my name 0% 10% D31 with the formula =D31 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel ell you that there is a problem, so you'll just get the wrong values for the data table! 7 Deviation SALES PRICE from 20 Deviation VARIABLE COST NPV Base Case $24.00 18.00 -20% 10% 209% from Sales Variable Cost/Unit So 20%%" Range . Now conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part b 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. (Hint: Use Scenario Manager. Go to the Data menu enu, choose What-If-Analyis, the choose Scenario Manager. After you create the Scenario's, you can create a Scenario Summary and use a cell reference to the Scenario Summary worksheet to show the NPV for each scenario.) Sales Price Variable Scenario Probability Unit Sales per Unit Costs per Unit NPV .1,200 $28.80 $14.40 50% 1,000 $24.00 $18.00 Worst Case. $19.20 521.60 .Expected NPV = .Standard Deviation .Coefficient of Variation = Std Dev / Expected NPV = .If the project appears to be more or less risky than an average project, find its risk-adjusted NPV, IRR, and CV range of firm's average-risk project.. Low-risk WACC = WACC 10% .High-risk WACC Risk-adjusted WACC = . Risk adjusted NPV = mmmPayback On the basis of information in the problem, would you recommend that the project be accepted ? Page 1