1. a. Madison Manufacturing is considering a new machine that costs $350,000 and
ID: 2732351 • 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 answer. I am posting it for the second time. This question is the same just the WACC is different .Thanks in advance
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
Explanation / Answer
Answer:
1.
Answer:2
sNPV = [(0.35)(-$46609 – $3360)2+ (0.35)($5990 – $3360)2+ (0.30)($58589 – $3360)2]½
= $42325
Answer:3 CV=Standard deviation/Expected NPV
=$42325/3360
=12.60
Worst case Scenario: Year 0 1 2 3 4 5 Intial investment -350000 Working capital -40000 Cost savings 88000 88000 88000 88000 88000 Depreciation 116655 155575 51835 25935 0 Operating income Before tax -28655 -67575 36165 62065 88000 Taxes (40%) -11462 -27030 14466 24826 35200 Operating income after tax -17193 -40545 21699 37239 52800 Add: Dep 116655 155575 51835 25935 0 Operating cash flow 99462 115030 73534 63174 52800 Return of NOWC 40000 Sale of machine 28000 Taxes on sale 11200 Net cash Flow -390000 99462 115030 73534 63174 109600 Discount rate 11% NPV -46609 Base case Scenario: Year 0 1 2 3 4 5 Intial investment -350000 Working capital -35000 Cost savings 110000 110000 110000 110000 110000 Depreciation 116655 155575 51835 25935 0 Operating income Before tax -6655 -45575 58165 84065 110000 Taxes (40%) -2662 -18230 23266 33626 44000 Operating income after tax -3993 -27345 34899 50439 66000 Add: Dep 116655 155575 51835 25935 0 Operating cash flow 112662 128230 86734 76374 66000 Return of NOWC 35000 Sale of machine 33000 Taxes on sale 13200 Net cash Flow -385000 112662 128230 86734 76374 120800 Discount rate 11% NPV 5990 Best case Scenario: Year 0 1 2 3 4 5 Intial investment -350000 Working capital -30000 Cost savings 132000 132000 132000 132000 132000 Depreciation 116655 155575 51835 25935 0 Operating income Before tax 15345 -23575 80165 106065 132000 Taxes (40%) 6138 -9430 32066 42426 52800 Operating income after tax 9207 -14145 48099 63639 79200 Add: Dep 116655 155575 51835 25935 0 Operating cash flow 125862 141430 99934 89574 79200 Return of NOWC 30000 Sale of machine 38000 Taxes on sale 15200 Net cash Flow -380000 125862 141430 99934 89574 132000 Discount rate 11% NPV 58589Related Questions
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