Reference no: EM132027530
Thomson Manufacturing is considering a new machine that costs $250,000 and would reduce pre-tax manufacturing costs by $90,000 annually.
The company would use the 3-year MACRS method to depreciate the machine, and the applicable depreciation rates would be 33%, 45%, 15%, and 7%. The management thinks the machine would have a value of $23,000 at the end of its 5-year operating life.
The company estimates that current assets would increase by $ 35,000 and payables increase by $10,000 initially, but the increase of the net working capital would be recovered at the end of project's 5-year life.
The company's WACC is 10% and marginal tax rate is 40%.
Calculate the initial year (i.e. Year 0) project cash flow.
Calculate the annual depreciation charges.
Calculate the project's annual operating cash flows.
Calculate the terminal year cash flow.
Calculate the project's NPV, IRR, and MIRR. If the project is of average risk, should the project be accepted?
Suppose the CFO is unsure about the cost saving and the machine's salvage value.
She asks you to use the following probability distribution of NPV to study the project's risk. Would you recommend the project be accepted?
Explain with your calculations of the project's risk.
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Scenario
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Probability
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NPV
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Worse
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35%
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-7,664
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Base
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35%
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37,035
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Best
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30%
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81,734
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