Reference no: EM132185216
Questions -
Q1. 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 40%, and a 13% cost of capital is appropriate for the project.
Calculate the project's NPV.
Calculate the project's IRR.
Calculate the project's MIRR.
Calculate the project's payback.
Q2. Assume management is unsure about the $110,000 cost savings - this figure could deviate by as much as plus or minus 20%. Calculate the NPV if cost savings value deviate by plus 20%. Round your answer to the nearest dollar.
Calculate the NPV if cost savings value deviate by minus 20%.
Q3. 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 |
0.25 |
$ 88,000 |
$28,000 |
$40,000 |
| Base case |
0.45 |
110,000 |
33,000 |
35,000 |
| Best case |
0.30 |
132,000 |
38,000 |
30,000 |
Calculate the project's expected NPV.
Calculate the project's standard deviation.
Calculate the project's coefficient of variation.