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FuncoLand has developed an efficient cloud server to 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 will require net working capital at the beginning of each year in an amount equal to 10% of the years 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 $17,000 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 3%. The companys nonvariable costs would be $1,000,000 at Year 1 and would increase at the inflation rate each year after that. The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. The projects returns are also expected to be highly correlated with returns on the firms other assets. The firm believes it could sell a constant 1,000 units per year. The equipment would be depreciated over 5 years, using MACRS rates (see page 496). The estimated market value of the equipment at the end of the projects 4-year life is $2,000,000. FuncoLands tax rate is 21% and its cost of capital is 11%.

Part 1: Cash Flow Estimation

A.Input Data Fill in the input data

Equipment cost
Net operating working capital/Sales
First year sales (in units)
Sales price per unit
Variable cost per unit (excl. depr.)
Nonvariable costs (excl. depr.)
Market value of equipment at Year 4
Tax rate
WACC
Inflation in prices and costs

B. Sales Revenue - Calculate the sales revenues for each year.

Year	0	1	2	3	4
Units sold
Sales price per unit (excl. depr.)
Variable costs per unit (excl. depr.)
Nonvariable costs (excl. depr.)
Variable costs
Sales revenue
Net Operating Working Capital

C. Salvage - Calculate the net cash flow due to salvage

Year	0	1	2	3	4
Basis for depreciation
Annual equipment depr. rate
Annual depreciation expense
Ending Book Value: Cost Accumulated Depreciation
Salvage value
Profit on salvage
Tax on profit
Net cash flow due to salvage

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