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

It would cost $10 millio

necessary to manufacture the server. The project would require net working capital at the beginning of each year in an amount equal to
example, NWC0 = 10%(Sales1). The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would amount
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 a

The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years
expected to be highly correlated with returns on the firm's other assets. The firm believes it could sell 1,000 units per y

The equipment would be depreciated over a 7-year period, using MACRS rates. The estimated market value of the e
6-year life is $500,000. Webmasters’ federal-plus-state tax rate is 40%. Its cost of capital is 10% for average-risk pro
coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8%, and

Question-1 Find the cash flow from the disposal of asset in the last year? 6 marks

Terminal value
Book value 1339000
salvage 500,000
Profit / loss -839000
tax -335600
Terminal 835,600
Cumulative cashflows 0 0 0 0

no of years before positve cash flow + (remaining cashflow/next year cashflow)

#DIV/0!
activities. It would cost $10 million at Year 0 to buy the equipment
of each year in an amount equal to 10% of the year's projected sales; for
that variable costs would amount to $17,500 per unit. After Year 1, the
sts would be $1 million at Year 1 and would increase with inflation.

continued for the entire 4 years. Also, the project's returns are
s it could sell 1,000 units per year.

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

14.29%
ital is 10% for average-risk projects, defined as projects with a
uated with a WACC of 8%, and high-risk projects at 13%. 1429000
 24.49% 17.49% 12.49% 8.93% 8.92%
2449000 1749000 1249000 893000 892000 8661000
Q-2 A bank lends loan of 450,000 @ 4 % per annum for the next 10 years.
Payments are due quarterly. What is the value of quarterly payment that borrower must pay for the nex
Also what is the payment value if interest rate changes to 5%, 6%, 7%, 9%, 11% and 15 %. Hint: Use sens

loan 450000 ($13,705.02)

rate 4% 0.01 5%
period 10 40 6%
Payment ($13,705.02) 7%
9%
11%
15%

Q-3 The following is the series of cashflows related to a new investment project, calculate the net present va
Also use two different functions applicable in excel for calculaiton of net present value.

0 1 2 3 4 5
-200 -100 -50 20 100 500

PV -200 $90.91 $41.32 ($15.03) ($68.30) ($310.46) ($261.56)

NPV $261.56
NPV $61.56
at borrower must pay for the next 10 years? 4.5 marks
9%, 11% and 15 %. Hint: Use sensitivity

oject, calculate the net present value with WACC as 10%? 4.5 marks
et present value.

($61.56)