Madison Manufacturing is considering a new machine that costs $350,000 and would
ID: 2764497 • Letter: M
Question
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 9% WACC is appropriate for the project. a. Calculate the project's NPV. Round your answer to the nearest dollar. $ Calculate the project's IRR. Round your answer to two decimal places % Calculate the project's MIRR. Round your answer to two decimal places % Calculate the project's payback. Round your answer to two decimal place 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. $ 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 0.30 $ 88,000 $28,000 $40,000 Base case 0.40 110,000 33,000 35,000 Best case 0.30 132,000 38,000 30,000 Calculate the project's expected NPV. Round your answer to the nearest dollar. $ Calculate the project's standard deviation. Round your answer to the nearest dollar. $ Calculate the project's coefficient of variation. Round your answer to two decimal places
Explanation / Answer
Madiosn Manufacturing Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 MACRS Rate 33.33% 44.45% 14.81% 7.41% Investment in Machinery (350,000) NWC (35,000) 35,000 Salvage 33,000 Pretax manufacturing cost reduction 110,000 110,000 110,000 110,000 110,000 Less Depreciation (116,655) (155,575) (51,835) (25,935) - Taxable Income (6,655) (45,575) 58,165 84,065 110,000 Tax @ 40% 2,662 18,230 (23,266) (33,626) (44,000) Tax on Salvage (13,200) Post Tax Income (3,993) (27,345) 34,899 50,439 85,800 Add Back Depreciation 116,655 155,575 51,835 25,935 - Net Cash Flow(with NWC return) (385,000) 112,662 128,230 86,734 76,374 120,800 PV factor @9% 1 0.9174 0.8417 0.7722 0.7084 0.6499 PV of Cssh flows (385,000) 103,360 107,929 66,975 54,105 78,512 1 NPV = $ 25,879.80 2 Payback years= 3.75 IRR Calculation Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 MACRS Rate 33.33% 44.45% 14.81% 7.41% Investment in Machinery (350,000) NWC (35,000) 35,000 Salvage 33,000 Pretax manufacturing cost reduction 110,000 110,000 110,000 110,000 110,000 Less Depreciation (116,655) (155,575) (51,835) (25,935) - Taxable Income (6,655) (45,575) 58,165 84,065 110,000 Tax @ 40% 2,662 18,230 (23,266) (33,626) (44,000) Tax on Salvage (13,200) Post Tax Income (3,993) (27,345) 34,899 50,439 85,800 Add Back Depreciation 116,655 155,575 51,835 25,935 - Net Cash Flow(with NWC return) (385,000) 112,662 128,230 86,734 76,374 120,800 PV factor @11.636% 1 0.8958 0.8024 0.7188 0.6438 0.5767 PV of Cssh flows (385,000) 100,919 102,892 62,341 49,173 69,670 NPV = (4) So At required rate of return=11.636% , the NPV is 0 3 So IRR =11.636% MIRR Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Net Cash Flow(with NWC return) (385,000) 112,662 128,230 86,734 76,374 120,800 Reinvestment Compunding Factor for Cash Inflows@9% 1.412 1.295 1.188 1.090 1.000 PV of Terminal Value of Cash Flows 159,032 166,062 103,049 83,248 120,800 Total Terminal ValuePV 632,190 MIRR = Nth root ( PV of terminal Value/PV of investment)-1 MIRR =5th Root (632190/385000)-1 4 MIRR =10.43%
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