Reference no: EM13976145
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%, 14.81%, and 7.42%, as discussed in Appendix 11A. Working capital would increase by $35,000 at the end of the projects 5 year life. Madison's marginal tax rate is 40%, and a 10% WACC is appropriate for the project.
a. Calculate the projects NPV, IRR, MIRR, and Payback.
b. Assume management is unsure about the $110,000 cost savings-this figure could deviate by as much as plus or minus 20%. What would the NPV be under each of those extremes?
c. Suppose the CEO wants you to do a scenario analysis with different values for the cost savings, the machines salvage value, and the working capital (WC) requirement. She asks you to use the following probabilities and calues in the scenario analysis:
Scenario Probability Cost Savings Salvage Value WC
Worst Case .35 $88,000 $28,000 $40,000
Base Case .35 $110,000 $33,000 $35,000
Best Case .30 $132,000 $38,000 $30,000
Calculate the projects NPV, its standard deviation, and it's coefficient of variation. Would you recommend that the project be accepted?
Please show work in excel with formulas / explanations as necessary.
|
Usually experiences seasonality in its cash balances
: Meals for the Homeless usually experiences seasonality in its cash balances. In December, contributions from donors increase its cash balances, and then these balances are used throughout the following year. By the fall, Meals for the Homeless has a ..
|
|
Evaluate the level of system security
: Evaluate the level of system security (i.e., high, medium, low) needed to ensure information integrity within automated business systems
|
|
What is the debt ratio
: Vigo Vacations has $202 million in total assets, $4.9 million in notes payable, and $23.5 million in long-term debt. What is the debt ratio?
|
|
Explain intuitively why this method would be cost-effective
: Under a strict command-and-control framework, suppose abatement standards are set equally across polluters. Assume the total abatement target is 30 units. Now, refer directly to your model, and summarize what would happen qualitatively to the abatem..
|
|
Calculate the projects NPV-IRR-MIRR and Payback
: 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 hav..
|
|
Expansion by issuing shares either as listed on stock market
: Technology Ltd is a business entity that sells high value, high quality DVD players. Technology Ltd has decided to expand the business and to fund the expansion by issuing shares either as listed on the stock market or as unlisted shares. Describe th..
|
|
Discounting and present values
: If the account had a beginning balance of $3,500, and you decided to make 2 equal deposits - one today and one 3 years from today - rather than a single deposit today, how much would you need to deposit each time? Assume the account's APR is 6.6%, co..
|
|
Transaction and excluding any inventory effects
: A trader is willing to purchase 1,000 shares of XYZ stock for a purchase price of $28.00 per share. Another trader is willing to sell 1,500 shares of XYZ stock at a selling price of $28.25 per share. Considering the number of shares that the dealer c..
|
|
Investment outlays and time period for the project
: Which items are necessary in calculating the net present value of a project? Investment outlays, Time period for the project, Incremental cash flow.
|