Webmasters.com has developed a powerful new server that would be used for the corporations Internet activities. It would cost $10 million to buy the equipment necessary to manufacture the server and it would require a net working capital commitment of $1 million. This commitment will be fully released at the end of the project. The servers would sell for $24,000 per unit and the company believes that variable costs would be $17,500 per unit. After the first year, the sales price and variable costs will increase at the inflation rate of 3% per year. The companys fixed costs will be $2.1 million per year and would increase with inflation. It would take 1 year to purchase the required equipment and set up operations and the server project would have a life of 4 years. The firm believes it can sell 1,000 units per year.

The equipment would be depreciated over 5 years and the straight line method of deprecation would be used for book and income tax purposes. The estimated salvage value of the equipment is estimated to be $0 at the end of the project. The companys federal and state combined income tax rate is 40%. At the end of the project, the company believes that the equipment will be sold for $500,000. You can assume that the capital gains rate for the equipment disposal is 40%. The companys WACC is 13%.

Required:

Prepare a cost flow schedule for the project outlining the projects cash flows.

Calculate the projects IRR.

Calculate the projects NPV.

Calculate the projects payback period in years.

Propose to management whether to accept or reject the project and why.