1. a. Madison Manufacturing is considering a new machine that costs $350,000 and
ID: 2732340 • Letter: 1
Question
1. a. 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 11% WACC is appropriate for the project. b. Assume management is unsure about the $110,000 cost savings - this figure could deviate by plus 20%. Calculate the NPV over the five-year period. Round your answer to the nearest dollar. Calculate the NPV over the five-year period if this figure could deviate by minus 20%. Round your answer to the nearest dollar. c. 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 $40,000 Base case 0.35 110,000 33,000 35,000 Best case 0.30 132,000 38,000 30,000 1. Calculate the project's expected NPV. Round your answer to the nearest dollar. 2. Calculate the project's standard deviation. Round your answer to the nearest dollar. 3. Calculate the project's coefficient of variation. Round your answer to two decimal places. Please attach the excel sheet alsoe
Explanation / Answer
If Cost savingdeviate by plus 20%:
If savings deviate by minus 20%
Years 1 2 3 4 5 Total ($) Annual pretax cost saving 132,000 132,000 132,000 132,000 132,000 Less: Depreciation 105,656 140,907 46,948 23,490 0 Net income 26,344 (8,907) 85,052 108,510 132,000 Tax@40% 10,538 0 34,021 43,404 52,800 After tax net income 15,806 (8,907) 51,031 65,106 79,200 Add: Depreciation 105,656 140,907 46,948 23,490 0 Working Capital (35,000) 0 0 0 35,000 Cash flow 86,462 132,000 97,979 88,596 114,200 WACC@11% 0.901 0.812 0.731 0.659 0.593 Present value 77,894 107,134 71,641 58,361 67,772 382,803 Less: Initial Investment 350,000 Net Present value (NPV) 32,803Related Questions
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