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Category > Management Posted 21 Jan 2018 My Price 10.00

project's returns

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 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.

he equipment would be depreciated over a 5-year period, using MACRS rates. The estimated market value of the equipment at the end of the projectAc€?cs 4-year life is $500,000. WebmastersAc€?c 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%.

****Please please please show exact formulas. I am trying to understand how to use these.

All the below information is available on google docs to provide a clean and efficient view:   https://docs.google.com/spreadsheets/d/1V0_RF9eSoFmICD73laFklFW_pmarM_nNzzd21h4lnFA/edit?usp=sharing

a. Develop a spreadsheet model, and use it to find the projectAc€?cs NPV, IRR, and payback.  
                 
Input Data (in thousands of dollars)            
Equipment cost   $10,000   Key Results:      
Net operating working capital/Sales 10%   NPV =      
First year sales (in units)   1,000   IRR    =      
Sales price per unit   $24.00   Payback =      
Variable cost per unit (excl. depr.) $17.50          
Nonvariable costs (excl. depr.) $1,000          
Market value of equipment at Year 4 $500          
Tax rate     40%          
WACC     10%          
Inflation in prices and costs 3.0%          
Estimated salvage value at year 4 $500          
                 
Intermediate Calculations     0 1 2 3 4
Units sold                
Sales price per unit (excl. depr.)            
Variable costs per unit (excl. depr.)            
Nonvariable costs (excl. depr.)            
Sales revenue              
Required level of net operating working capital          
Basis for depreciation     $10,000        
Annual equipment depr. rate         20.00% 32.00% 19.20% 11.52%
Annual depreciation expense                
Ending Bk Val: Cost Ac€?o Accum Dep'rn   $10,000        
Salvage value             $500
Profit (or loss) on salvage              
Tax on profit (or loss)              
Net cash flow due to salvage            
        Years
Cash Flow Forecast     0 1 2 3 4
Sales revenue              
Variable costs              
Nonvariable operating costs            
Depreciation (equipment)              
Oper. income before taxes (EBIT)            
Taxes on operating income (40%)            
Net operating profit after taxes            
Add back depreciation              
Equipment purchases              
Cash flow due to change in NOWC            
Net cash flow due to salvage            
Net Cash Flow (Time line of cash flows)            
                 
Key Results: Appraisal of the Proposed Project          
                 
Net Present Value (at 10%) =            
IRR =                
MIRR =                
Payback =                
Data for Payback    Years     Years
        0 1 2 3 4
      Net cash flow          
      Cumulative CF          
      Part of year required for 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 variablesAc€?c values at 10% and 20% above and below their base-case values. Include a graph in your analysis.
                 
% Deviation SALES PRICE   Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example, the base case Sales Price in Cell B86 should be the number $24.00 you should NOT have the formula =D28 in that cell. This is because you'll use D28 as the column input cell in the data table and if Excel tries to iteratively replace Cell D28 with the formula =D28 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won't tell you that there is a problem, so you'll just get the wrong values for the data table!
from Base NPV  
Base Case $24.00    
-20%      
-10%      
0%      
10%      
20%      
       
       
                 
% Deviation VARIABLE COST   % Deviation 1st YEAR UNIT SALES    
from Base NPV   from Base NPV    
Base Case $17.50     Base Case 1,000      
-20%       -20%        
-10%       -10%        
0%       0%        
10%       10%        
20%       20%        
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
  Deviation NPV at Different Deviations from Base        
  from Sales Variable          
  Base Case Price Cost/Unit Units Sold        
  -20% $0 $0 $0        
  -10% $0 $0 $0        
  0% $0 $0 $0        
  10% $0 $0 $0        
  20% $0 $0 $0        
                 
  Range              
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
   
     
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.
                 
                 
                 
      Sales Unit Variable      
Scenario Probability Price Sales Costs NPV    
                 
Best Case 25% $28.80 1,200 $14.00      
Base Case 50% $24.00 1,000 $17.50      
    Worst Case 25% $19.20 800 $21.00      
                 
          Expected NPV =      
          Standard Deviation =      
          Coefficient of Variation = Std Dev / Expected NPV =      
 
 
     
 
         
       
 
 
         
       
 
   
 
     
 
   
         
d. If the project appears to be more or less risky than an average project, find its risk-adjusted NPV, IRR, and payback.
                 
CV range of firm's average-risk project:   0.8 to 1.2    
Low-risk WACC = 8%            
WACC = 10%            
High-risk WACC = 13%            
                 
Risk-adjusted WACC =              
  Risk adjusted NPV =              
  IRR =              
  Payback =              
                 
e. On the basis of information in the problem, would you recommend that the project be accepted?
                 
 
                 
 

 

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Maurice Tutor
(5)
Status NEW Posted 21 Jan 2018 08:01 PM My Price 10.00

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