Webmasters.com 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, NWCo - 10%(Salesi). The servers would sell for $24,000 per unit, and Webmasters believes 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 company's nonvariable costs would be $1 million at Year 1 and would increase with inflation. 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 project's returns are expected to be highly correlated with returns on the firm's 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. 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 40%. 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 projects are evaluated with a WACC of 8%, and high-risk projects at 13%. Estimated the project cash flow and then find the project's NPV 5 Part 1. Input Data (in thousands of dollars) 5 Equipment cost $10,000 8 Net WC/Sales 1096 9 First year sales (in units) 1,000 Sales price per unit $24.00 1 Variable cost per unit $17.50 2 Nonvariable costs $1,000 3 Market value of equipment at Year 4 Tax rate WACC Inflation S500 4096 1096 3.096 ceum Accum'd Depr'n 3 4 19.0% 12.0% 2 3 4 34 Part 2. Depreciation and Amortization Schedule Years 35 Year Initial Cost 1 2 36 37 Equipment Depr'n Rate 20.0% 32.0% 38 Equipment Depr'n, Dollars 39 Ending Bk Val: Cost - Accum Dep'rn 40 41 Part 3. Net Salvage Values, in Year 4 Equipment 42 Estimated Market Value in Year 4 43 Book Value in Year 4 44 Expected Gain or Loss 45 Taxes paid or tax credit 46 Net cash flow from salvage 47 48 Part 4. Projected Net Cash Flows (Time line of Annual Cash Flows) 49 Years 0 1 50 Investment Outlays at Time Zero: 51 Equipment 52 53 Operating Cash Flows over the Project's Life: 54 Units sold 55 Sales price 56 Variable costs 57 58 Sales revenue 59 Variable costs 60 Nonvariable operating costs 61 Depreciation (equipment) 62 Oper. income before taxes (EBIT) 63 Taxes on operating income (40%) 64 After-tax operating income 65 Add back depreciation 66 Operating cash flow 67 68 Terminal Year Cash Flows: 69 Required level of niet working capital 70 Required inventment in NWC 71 72 Terminal Year Cash Flows: 73 Net salvage value 74 75 Net Cash Flow (Time line of cash flows) 76 Part 5. Key Output: Appraisal of the Proposed Project Net Present Value (at 10%) 1 2 Webmasters.com has developed a powerful new server that would be used for corporations' Internet activities. It would 6 cost $10 million at Year 0 to buy the equipment necessary to manufacture the server. The project would require net 7 8 working capital at the beginning of each year in an amount equal to 10% of the year's projected sales; for example, NWC= 10%(Sales). The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would 9 10 amount to $17,500 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 would increase with inflation. 11 12 13 The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. 14 Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm 15 believes it could sell 1,000 units per year. 16 17 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 40%. Its cost of 19 capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. 20 Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%. 21 22 Estimated the project cash flow and then find the project's NPV 23 18 Webmasters.com 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, NWCo - 10%(Salesi). The servers would sell for $24,000 per unit, and Webmasters believes 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 company's nonvariable costs would be $1 million at Year 1 and would increase with inflation. 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 project's returns are expected to be highly correlated with returns on the firm's 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. 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 40%. 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 projects are evaluated with a WACC of 8%, and high-risk projects at 13%. Estimated the project cash flow and then find the project's NPV 5 Part 1. Input Data (in thousands of dollars) 5 Equipment cost $10,000 8 Net WC/Sales 1096 9 First year sales (in units) 1,000 Sales price per unit $24.00 1 Variable cost per unit $17.50 2 Nonvariable costs $1,000 3 Market value of equipment at Year 4 Tax rate WACC Inflation S500 4096 1096 3.096 ceum Accum'd Depr'n 3 4 19.0% 12.0% 2 3 4 34 Part 2. Depreciation and Amortization Schedule Years 35 Year Initial Cost 1 2 36 37 Equipment Depr'n Rate 20.0% 32.0% 38 Equipment Depr'n, Dollars 39 Ending Bk Val: Cost - Accum Dep'rn 40 41 Part 3. Net Salvage Values, in Year 4 Equipment 42 Estimated Market Value in Year 4 43 Book Value in Year 4 44 Expected Gain or Loss 45 Taxes paid or tax credit 46 Net cash flow from salvage 47 48 Part 4. Projected Net Cash Flows (Time line of Annual Cash Flows) 49 Years 0 1 50 Investment Outlays at Time Zero: 51 Equipment 52 53 Operating Cash Flows over the Project's Life: 54 Units sold 55 Sales price 56 Variable costs 57 58 Sales revenue 59 Variable costs 60 Nonvariable operating costs 61 Depreciation (equipment) 62 Oper. income before taxes (EBIT) 63 Taxes on operating income (40%) 64 After-tax operating income 65 Add back depreciation 66 Operating cash flow 67 68 Terminal Year Cash Flows: 69 Required level of niet working capital 70 Required inventment in NWC 71 72 Terminal Year Cash Flows: 73 Net salvage value 74 75 Net Cash Flow (Time line of cash flows) 76 Part 5. Key Output: Appraisal of the Proposed Project Net Present Value (at 10%) 1 2 Webmasters.com has developed a powerful new server that would be used for corporations' Internet activities. It would 6 cost $10 million at Year 0 to buy the equipment necessary to manufacture the server. The project would require net 7 8 working capital at the beginning of each year in an amount equal to 10% of the year's projected sales; for example, NWC= 10%(Sales). The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would 9 10 amount to $17,500 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 would increase with inflation. 11 12 13 The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. 14 Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm 15 believes it could sell 1,000 units per year. 16 17 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 40%. Its cost of 19 capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. 20 Low-risk projects are evaluated with a WACC of 8%, and high-risk projects at 13%. 21 22 Estimated the project cash flow and then find the project's NPV 23 18