|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.