Question;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 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%.;a. Develop a spreadsheet;model, and use it to find the project?s NPV, IRR, and payback. b. 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 c. 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.;values. Include a graph in your analysis.d. If the project appears;to be more or less risky than an average project, find its risk-adjusted NPV;IRR, and payback.e. On the basis of;information in the problem, would you recommend that the project be accepted?
Paper#40778 | Written in 18-Jul-2015Price : $34