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Webmasters Com Has Developed A Powerful New Server That Would Be

Webmasters.com is considering developing a new server that would cost $10 million to purchase equipment and $3 million for operating capital. The servers would sell for $24,000 each with variable costs of $17,500 per unit. They estimate selling 1,000 units over 4 years. A sensitivity analysis should be done on sales price, costs, and number of units sold to determine the effect on NPV. A scenario analysis should also be done to account for best, worst, and base cases. The risk level must be determined to apply the appropriate discount rate for the NPV calculation.

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Muhammad Shahid
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155 views1 page

Webmasters Com Has Developed A Powerful New Server That Would Be

Webmasters.com is considering developing a new server that would cost $10 million to purchase equipment and $3 million for operating capital. The servers would sell for $24,000 each with variable costs of $17,500 per unit. They estimate selling 1,000 units over 4 years. A sensitivity analysis should be done on sales price, costs, and number of units sold to determine the effect on NPV. A scenario analysis should also be done to account for best, worst, and base cases. The risk level must be determined to apply the appropriate discount rate for the NPV calculation.

Uploaded by

Muhammad Shahid
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Webmasters com has developed a powerful new server

that would be #6147


Webmasters.com has developed a powerful new server that would be used for corporations'
Internet activities. It would cost $10 million to purchase the equipment necessary to
manufacture the server, and $3 million of net operating working capital would be required. The
servers would sell for $24,000 per unit, and Webmasters believes that variable costs would
amount to $17,500 per unit. The company's fixed costs would also rise by $1 million per year. It
would take 1 year to purchase the required equipment and set up operations, and the server
project would have a life of 4 years. Conditions are expected to remain stable during each year
of the operating life; that is, unit sales, sales price, and costs would be unchanged. 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.The equipment would be depreciated over a 5-year period, using MACRS
rates as described in Appendix 12A. 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 percent. Its
cost of capital is 10 percent 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
percent, and high-risk projects are evaluated at 13 percent.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 percent and 20 percent above and below
their base-case values. Include a graph in your analysis.c. Now conduct a scenario analysis.
Assume that there is a 25 percent probability that "best-case" conditions, with each of the
variables discussed in part b being 20 percent better than its base-case value, will occur. There
is a 25 percent probability of "worst-case" conditions, with the variables 20 percent worse than
base, and a 50 percent probability of base-case conditions.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?View
Solution:
Webmasters com has developed a powerful new server that would be

ANSWER
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