Question

FuncoLand has developed an efficient, new cloud server that that it can sell to other corporations to boost online operations and stability. For FuncoLand, it would cost $10,000,000 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 specialists estimate 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 $1,000,000 at Year 1 and would increase at the inflation rate each year thereafter. 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 (see page 500). The estimated market value of the equipment at the end of the project’s 4-year life is $500,000. FuncoLand’s federal-plus-state tax rate is 30%. Its cost of capital is 10%.

A) Calculate the NPV, IRR, MIRR, Payback and Discounted Payback using Excel functions.

Net Present Value (at 10%)
IRR
MIRR
Payback
Discounted Payback

Data for Payback

Years	0	1	2	3	4
Net Cash Flow
Cumulative CF

Data for Discount Payback

Years	0	1	2	3	4
Net CashFlow
Discounted CF
Cumulative CF

B) Use the Excel What-IF Analysis to conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price. Set the variables’ values at 10% and 20% above and below their base-case values. Include a graph in your analysis of the NPV on the y-axis and the percent deviation from base on the x-axis. Label the graph title and axes.

Base Sales Price

% Deviation from Base Case	Sales Price	NPV
-20%
-10%
0%
10%
20%

C) Conduct a scenario analysis using the Excel What-If analysis. Assume that there is a 25% probability that best-case conditions, 25% probability that worst-case conditions, and a 50% probability that base-case conditions will occur. Calculate the expected NPV.

		Sales	Unit	Variable
Scenario	Probability	Price	Sales	Costs	NPV
Best Case	25%	$28,800	1,200	$14,000
Base Case	50%	$24,000	1,000	$17,500
Worst Case	25%	$19,200	800	$21,000

Expected NPV

Answer 1