Webmasters.com has developed a powerful new server that would be used for corporations’ Internet activities.

It wou
the equipment necessary to manufacture the server. The project would require net working capital at the beginning of
of the year's projected sales; for example, NWC0 = 10%(Sales1). The servers would sell for $24,000 per unit, and Webm
would amount to $17,500 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 3
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 yea
expected to be highly correlated with returns on the firm's other assets. The firm believes it could sell 1,000 units per

The equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the e
4-year life is $500,000. Webmasters’ federal-plus-state tax rate is 40%. Its cost of capital is 10% for average-risk proje
coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and high-risk

a. Develop a spreadsheet model, and use it to find the project’s NPV, IRR, and payback.

Input Data (in thousands of dollars)

Equipment cost $10,000,000 1
Net operating working capital/Sales 10% 2
First year sales (in units) 1,000 3
Sales price per unit $24,000.00 4
Variable cost per unit (excl. depr.) $17,500.00 5
Nonvariable costs (excl. depr.) $1,000,000 6
Tax rate 40%
WACC 10%
Inflation in prices and costs 3.0%
Estimated salvage value at year 4 $500,000

Intermediate Calculations 0 1
Units sold 1,000
Sales price per unit (excl. depr.) $24,000.00
Variable costs per unit (excl. depr.) $17,500.00
Nonvariable costs (excl. depr.) $1,000,000
Sales revenue $24,000,000.00
Required level of net operating working capital $2,400,000.00 $2,472,000.00
Basis for depreciation $10,000,000
Annual equipment depr. rate 20%
Annual depreciation expense $2,000,000
Ending Bk Val: Cost – Accum Dep'rn $8,000,000
Salvage value
Profit (or loss) on salvage
Tax on profit (or loss)
Net cash flow due to salvage
Years
Cash Flow Forecast 0 1
Sales revenue $24,000,000.00
Variable costs $17,500,000.00
Nonvariable operating costs 1000000
Depreciation (equipment) 2000000
Oper. income before taxes (EBIT) $3,500,000.00
Taxes on operating income (40%) $1,400,000.00
Net operating profit after taxes $2,100,000.00
Add back depreciation $4,100,000.00
Equipment purchases ($10,000,000)
Cash flow due to change in NOWC $2,400,000.00 -$72,000.00
Net cash flow due to salvage
Net Cash Flow (Time line of cash flows) ($12,400,000.00) $4,028,000.00
 s’ Internet activities. It would cost $10 million at Year 0 to buy
g capital at the beginning of each year in an amount equal to 10%
$24,000 per unit, and Webmasters believes that variable costs
ease at the inflation rate of 3%. The company’s nonvariable costs

expansion project implement cash as it is

ontinued for the entire 4 years. Also, the project's returns are
it could sell 1,000 units per year.
replacement match with existing

imated market value of the equipment at the end of the project’s

s 10% for average-risk projects, defined as projects with a
WACC of 8%, and high-risk projects at 13%.

MACRS
20%
32%
19.20%
11.52%
11.52%
5.76%

OPENING BOOK VALUE-DEPRECIATION

2 3 4
1,000 1,000 1,000
24720 25461.6 26225.448
18025 18565.75 19122.7225
1030000 1060900 1092727
$24,720,000.00 $25,461,600.00 $26,225,448.00
$2,546,160.00 $2,622,544.80 $0.00

32% 19.20% 11.52%

$3,200,000 $1,920,000.00 $1,152,000.00
$4,800,000 $2,880,000.00 $1,728,000.00
 $500,000
$1,228,000.00
$491,200.00
$991,200.00
Years
2 3 4
$24,720,000.00 $25,461,600.00 $26,225,448.00
$18,025,000.00 $18,565,750.00 $19,122,722.50
1030000 1060900 1092727
3200000 1920000 1152000
$2,465,000.00 $3,914,950.00 $4,857,998.50
$986,000.00 $1,565,980.00 $1,943,199.40
$1,479,000.00 $2,348,970.00 $2,914,799.10
$4,679,000.00 $4,268,970.00 $4,066,799.10

-$74,160.00 -$76,384.80 $2,622,544.80

$991,200.00
$4,604,840.00 $4,192,585.20 $7,680,543.90
cash as it is
 1. Pilsudski Coal Company is considering the replacement of tw
years old with a new, more efficient machine. The two old machi
for a total of $70,000 in the secondary market, but they wo
salvage value if held to the end of their remaining useful life. T
basis totaled $300,000. They have a depreciated tax book value o
useful life of eight years. MACRS depreciation is used on these
five-year property class assets. The new machine can be purc
$480,000. It has a useful life of eight years, at the end of which a
expected. The machine falls into the five-year property class for
(depreciation) purposes. Owing to its greater efficiency, the ne
result in incremental annual operating savings of $100,000. T
tax rate is 40 percent, and if a loss occurs in any year on the pro
company can offset the loss against other compa
What are the incremental cash inflows over the eight years, an
cash outflow at time 0?

PAST LIFE 3 YEARS

SELLING PRICE $70,000
SALVAGE VALUE OF OLD MACHINES 0
COST OF OLD MACHINE $300,000
BOOK VALUE OF OLD MACHINES $86,400
COST OD NEW MACHINE $480,000
USEFULL LIFE 8 YEARS
SALVAGE VALUE OF NEW MACHINES $40,000
OPERATING SAVINGS $100,000
TAX RATE 40%

YEARS 1
INFLOW OPERATIONAL SAVINGS $100,000
INCREMENTAL DEPRECIATION
RATES 20%
OLD MACHINE DEPRECIATION $34,560
NEW MACHINE DEPRECIATION $96,000
OUTFLOW CHANGE IN DEPRECIATION $61,440
EBIT SAVING-DEPRECIATION $38,560
TAX $15,424
EARNING AFTER TAX $23,136
CASH FLOWS ADD DEPRECIATION $84,576
initial outlay at year 0
outflow due to new machine $480,000
inflow due to sale of old machine $70,000
tax $6,560
net outflow $403,440
dering the replacement of two machines that are three
machine. The two old machines could be sold currently
econdary market, but they would have a zero final
their remaining useful life. Their original depreciable
depreciated tax book value of $86,400, and a remaining
depreciation is used on these machines, and they are
he new machine can be purchased and installed for
years, at the end of which a salvage value of $40,000 is
e five-year property class for accelerated cost recovery
its greater efficiency, the new machine is expected to
rating savings of $100,000. The company’s corporate
occurs in any year on the project, it is assumed that the
the loss against other company income.
ows over the eight years, and what is the incremental
ash outflow at time 0?

2 3 4 5 6 7 8
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000

32% 19.20% 11.52% 11.52% 5.76% 0% 0%

$34,560 $17,280
$153,600 $92,160 $55,296 $55,296 $27,648
$119,040 $74,880 $55,296 $55,296 $27,648 $0 $0
-$19,040 $25,120 $44,704 $44,704 $72,352 $100,000 $100,000
-$7,616 $10,048 $17,882 $17,882 $28,941 $40,000 $40,000
-$11,424 $15,072 $26,822 $26,822 $43,411 $60,000 $60,000
$107,616 $89,952 $82,118 $82,118 $71,059 $60,000 $60,000
INFLOW $40,000
NET INFLOW $16,000
 net inflow due to salvage $24,000
terminal $84,000

tax sheild inflow