Fluent Essays

Attached Question in a word document Note :  Submit your answers in a Word document. Should be 0\% Plagiarism APA Format. Minimum atleast 2 to 3 papers  Plagiarism Report is required. If you reviewed any definition from the sources add the reference as well. NOTE: Citations are required if neededStart with the partial model in the attached. Pinto.com has developed a powerful new server that would be used for corporations’ Internet activities. It would cost $25 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 12\% of the year’s projected sales; for example, NWC0 = 12\%(Sales1 ). The servers would sell for $21,000 per unit, and Pinto believes that variable costs would amount to $15,000 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 2.5\%. The company’s nonvariable costs would be $1.5 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 2,000 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 $1 million. Pinto.com’s federal-plus-state tax rate is 20\%. 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 an 8\% project cost of capital and high-risk projects at 13\%. 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\% and 20\% above and below their base-case values. 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. 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 the project should be accepted? Submit your answers in a Word and/or Excel document.Build a Model Chapter: 11 Cash Flow Estimation and Risk Analysis a. Develop a spreadsheet model, and use it to find the project’s NPV, IRR, and payback. Input Data (in thousands of dollars) Scenario name Base Case Note: the items in red will be used in a scenario analysis. Probability of scenario 50\% Equipment cost $25,000 Net operating working capital/Sales 12\% Key Results: First year sales (in units) 2,000 NPV = Sales price per unit $21.00 IRR = Variable cost per unit (excl. depr.) $15.00 Payback = Nonvariable costs (excl. depr.) $1,500 Inflation in prices and costs 2.5\% Estimated salvage value at year 4 $1,000 Depreciation years Year 1 Year 2 Year 3 Year 4 Depreciation rates 20.00\% 32.00\% 19.20\% 11.52\% Tax rate 20\% WACC for average-risk projects 10\% 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 Annual equipment depr. rate 20.00\% 32.00\% 19.20\% 11.52\% Annual depreciation expense Ending Bk Val: Cost – Accum Deprn Salvage value 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 (20\%) 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 = Discounted Payback = Data for Payback Years Years 0 1 2 3 4 Net cash flow Cumulative CF Part of year required for payback Data for Discounted Payback Years Years 0 1 2 3 4 Net cash flow $0 $0 $0 $0 $0 Discounted cash flow Cumulative CF Part of year required for discounted 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\% and 20\% above and below their base-case values. \% Deviation 1st YEAR UNIT SALES 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 1st Year Unit Sales in Cell B79 should be the number 2,000 and NOT have the formula =D10 in that cell. This is because youll use D10 as the column input cell in the data table and if Excel tries to iteratively replace Cell D10 with the formula =D10 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel wont tell you that there1-Base-Case Tool Kit Chapter 11 11/21/18 Note: Calculations are automatic, including for tables. This will make the calculations take longer to complete. You can disable automatic calculations for tables by following the steps shown here. Cash Flow Estimation and Risk Analysis Worksheet 1-Base-Case This worksheet contains the base-case model. It calculates an expansion projects cash flows and performance measures using base-case, or most likely, values for the input variables. It also includes the basic analysis but with straight-line depreciation and bonus depreciation. Go to the menu Files at the top left of the menu bar. Select Options from the items in the first column. This will give you the screen shown below: The second worksheet (2-Sens) extends the basic model to include sensitivity analysis using Data Tables (we include a brief tutorial on the use of Data Tables). Worksheet 2-Sens also illustrates special cases of sensitivity analysis, including breakeven analysis, one-way data tables with multiple outputs, and two-way data tables. Worksheet 3a-Sens extends the basic model to include scenario analysis. Worksheet 3b-ScenMgr shows how to use Excels Scenario Manager for scenario analysis. Worksheet 4-Sim extends the basic model to include simulation analysis. Worksheet 5-Replmt illustrates the analysis for a proposed cost-reducing replacement investment. Replacement decisions differ from expansion decisions because most of the cash flows are found by subtracting the old projects cash flows from those of the new project to calculate incremental cash flows for use in the analysis. Worksheet 6-DecTree extends the scenario analysis to examine two decision trees in which the decision is made in stages. The first one simply shows the situation where the firm can abandon the project if things are not working out and cash flows are negative. The second one involves a marketing study and a prototype of the final product designed to learn more about demand before deciding to go into full production. Worksheet Appendix 11-A provides depreciation tables as described in Appendix A of the textbook. It also shows examples using straight-line depreciation and bonus depreciation. 11-1 Identifying Relevant Cash Flows A proposal’s relevant project cash flows are the differences between the cash flows the firm will have if it implements the project versus the cash flows it will have if it rejects the project. These are called incremental cash flows. Choose Formulas in the first column. 11-2 Analysis of an Expansion Project This will give you the screen shown below. The figure below shows the inputs and key results of Project L (one of the projects whose cash flows are used in the previous chapter); the actual analysis is conducted further below in the worksheet. The values in the Inputs section are linked to the