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, NWC0 = 10%(Sales1). 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 companys 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 projects 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%.
a. Develop a spreadsheet model, and use it to find the projects NPV, IRR, and payback.
						Key Output:	NPV =
Part 1. Input Data (in thousands of dollars)							IRR =
							MIRR =
Equipment cost			$10,000
Net WC/Sales			10%		Market value of equipment at Year 4			$500
First year sales (in units)			1,000		Tax rate			40%
Sales price per unit			$24.00		WACC			10%
Variable cost per unit			$17.50		Inflation			3.0%
Nonvariable costs			$1,000
Part 2. Depreciation and Amortization Schedule				Years				Accum'd
Year			Initial Cost	1	2	3	4	Depr'n
Equipment Depr'n Rate				20.0%	32.0%	19.0%	12.0%
Equipment Depr'n, Dollars
Ending Bk Val: Cost Accum Dep'rn
Part 3. Net Salvage Values, in Year 4					Equipment
Estimated Market Value in Year 4
Book Value in Year 4
Expected Gain or Loss
Taxes paid or tax credit
Net cash flow from salvage
Part 4. Projected Net Cash Flows (Time line of Annual Cash Flows)
		Years		0	1	2	3	4
Investment Outlays at Time Zero:
Equipment
Operating Cash Flows over the Project's Life:
Units sold
Sales price
Variable costs
Sales revenue
Variable costs
Nonvariable operating costs
Depreciation (equipment)
Oper. income before taxes (EBIT)
Taxes on operating income (40%)
After-tax operating income
Add back depreciation
Operating cash flow
Terminal Year Cash Flows:
Required level of net working capital
Required investment in NWC
Terminal Year Cash Flows:
Net salvage value
Net Cash Flow (Time line of cash flows)
Part 5. Key Output: Appraisal of the Proposed Project
Net Present Value (at 10%)
IRR
MIRR
Payback (See calculation below)					3
Data for Payback Years				0	1	2	3	4
	Net cash flow
	Cumulative CF			0
	Part of year required for payback