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

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Webmasters.com has developed a powerful new server that would be
used for corporations' Internet activities. It would cost $11
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 13% of the year's
projected sales; for example, NWC0 =
13%(Sales1). The servers would sell for $27,500 per
unit, and Webmasters believes that variable costs would amount to
$20,000 per unit. After Year 1, the sales price and variable costs
will increase at the inflation rate of 4%. 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
900 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 $700,000. Webmasters.com's
federal-plus-state tax rate is 25%. Its cost of capital is 12% 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 9% project cost of capital and high-risk projects
at 14%.
.
Develop a spreadsheet model, and use it to find the project's
NPV, IRR, and payback. Round your answer for the NPV to the nearest
dollar and for the IRR and payback to two decimal places.
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 values. Round your answers to the
nearest dollar. Use a minus sign to enter a negative value, if
any.
Choose the correct graph.
Now conduct a scenario analysis. Assume that there is a 30%
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 30% probability of worst-case conditions, with
the variables 20% worse than base, and a 40% probability of
base-case conditions. Round your answers for the NPV and standard
deviation to the nearest dollar and for the coefficient of
variation to two decimal places. Use a minus sign to enter a
negative value, if any.
If the project appears to be more or less risky than an average
project, find its risk-adjusted NPV, IRR, and payback. Round your
answer for the NPV to the nearest dollar and for the IRR and
payback to two decimal places. Use a minus sign to enter a negative
value, if any.