# BUS1 173 SJSU Equipment Cost and Maintenance Excel Question

## Description

All the instructions and questions are in the word document. Plesae answer them using the answer sheet.

Textflix is a new idea to help reduce college student cost of textbooks.Textflix is a new project to be undertaken by the Netflix Corporation.Textflix will charge \$10 per month to have access to a large library of textbooks.It expects to have 8,000 users in first year, 20,000 in second and 150,000 in third.To build out this new project, new infrastructure for space and new tech equipment will cost \$3,000,000.The costs of each sale will be approximately \$50 per year in licensing fees, maintenance, app space, and all the other good things we should consider. Depreciation will be 16% year 1, 20% year 2 and 20% year 3 and the building and equipment will be sold for 60% of original purchase price in year 3. Tax rate is 21%. Since this is a new project by an existing firm, we will assume this new project matches the overall risk of the current firm, thus we can use the firm’s cost of capital directly, which is 10.5% (required rate of return). Net working capital invested for the project will be 1,000,000 today. The company has 3,000,000 shares outstanding.

Calculate the NPV of the project. Accept or Reject? Calculate the IRR of the project. Accept or reject?If you had to choose one of the two approaches above, which would you choose and why? Utilizing our pro-forma income statements, what is the expected EPS for the firm in year 2 for this scenario.

What if the economy goes south?There is a 20% chance this will happen. Well, there could be some argument that colleges get more enrollment when the economy slows a bit because while you are out of a job, why not go back to school a bit.So, let’s say that unit sales increase by 12% each year, costs decrease by 3% and the building costs a little less, so capex is \$2.7 million, but can only sell for 45% of original price. Taxes get raised to 29%. Required rate of return is 9%. Calculate NPV, IRR, and Profitability Index. No qualitative responses.

What if the economy keeps running?There is a 40% chance of this. It’s easy to get student loans, people don’t care about textbook costs, enrollment is lower, etc.Therefore, unit sales are down 15%. Costs are up 5%. Selling price is down 10%. Required rate of return goes up to 16%. Calculate the NPV.

Answer the following questions on the “Economy Keeps Running” sheet.

Utilizing our pro-forma income statements, what is the expected EPS for the firm in year 2 considering probabilities.

What is the expected NPV of entire project considering the three scenarios? Which scenario is most important to understand and why?