1 answer

Madison Manufacturing is considering a new machine that costs $350,000 and would reduce pre-tax manufacturing costs...

Question:

Madison Manufacturing is considering a new machine that costs $350,000 and would reduce pre-tax manufacturing costs by $110,000 annually. Madison would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $33,000 at the end of its 5-year operating life. The applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. Working capital would increase by $35,000 initially, but it would be recovered at the end of the project's 5-year life. Madison's marginal tax rate is 25%, and a 10% cost of capital is appropriate for the project.

  1. Calculate the project's NPV, IRR, MIRR, and payback. Do not round intermediate calculations. Round the monetary value to the nearest dollar and percentage values and payback to two decimal places. Negative values, if any, should be indicated by a minus sign.

    NPV: $  

    IRR:   %

    MIRR:   %

    The project's payback:  years

  2. Assume management is unsure about the $110,000 cost savings - this figure could deviate by as much as plus or minus 20%. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative values, if any, should be indicated by a minus sign.

    Calculate the NPV if cost savings value deviate by plus 20%.

    $  

    Calculate the NPV if cost savings value deviate by minus 20%.

    $  

  3. Suppose the CFO wants you to do a scenario analysis with different values for the cost savings, the machine's salvage value, and the working capital (WC) requirement. She asks you to use the following probabilities and values in the scenario analysis:

    Scenario Probability Cost Savings Salvage Value WC
    Worst case 0.35 $  88,000    $28,000    $40,000
    Base case 0.35 110,000    33,000    35,000
    Best case 0.30 132,000    38,000    30,000

    Calculate the project's expected NPV, its standard deviation, and its coefficient of variation. Do not round intermediate calculations. Round the monetary values to the nearest dollar and a coefficient of variation to two decimal places. Negative values, if any, should be indicated by a minus sign.

    The project's expected NPV: $  

    Standard deviation: $  

    Coefficient of variation:


Answers

Calculation of NPV

(1) NPV = present value of cash inflow - present value of cash outflow

= $409075.1 - $385000

= $24075.07

(2)IRR = 12.34 %

(3) MIRR + 13.33%

Working note.1 calculation of cash outflow & cash inflow

   Cash outflow = 350000+35000 = 385000

   Cash inflows = 110000*.75*3.7908 + 68000*0.621+54106.07

   = 409075.1

.

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