New-Project Analysis Madison Manufacturing is considering a new machine that cos
ID: 2651271 • Letter: N
Question
New-Project Analysis
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% WACC is appropriate for the project.
1.Calculate the project's NPV. Round your answer to the nearest dollar. $
2.Calculate the project's IRR. Round your answer to two decimal places %
3.Calculate the project's MIRR. Round your answer to two decimal places %
4. Calculate the project's payback. Round your answer to two decimal places
5. Assume management is unsure about the $110,000 cost savings - this figure could deviate by plus 20%. a.Calculate the NPV over the five-year period. Round your answer to the nearest dollar.
$
b. Calculate the NPV over the five-year period if this figure could deviate by minus 20%. Round your answer to the nearest dollar.
$
6. 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:
a.Calculate the project's expected NPV. Round your answer to the nearest dollar.
$
b.Calculate the project's standard deviation. Round your answer to the nearest dollar.
$
c. Calculate the project's coefficient of variation. Round your answer to two decimal places
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
Explanation / Answer
Answer 1
Figures in $
Years
Mfg cost saving
salvage value
Depreciation tax benefit
Initial cost
Working capital
Cashflow
Disc rate 13%
Present value
Pre tax mfg cost * (1-tax rate)
Salvage value (1- tax rate)
Cost * tax rate * depre rate
A
B
C
D
E
F
G
F*G
A+B+C+D+E
0
0
0
0
-350000
-35000
-385000
1
-385000
1
66000
0
46662
0
0
112662
0.88
99700.88
2
66000
0
62230
0
0
128230
0.78
100422.90
3
66000
0
20734
0
0
86734
0.69
60111.01
4
66000
0
10374
0
0
76374
0.61
46841.60
5
66000
19800
0
0
35000
120800
0.54
65565.40
NPV
-12358.20
Answer : The project's NPV is -12358.20
Answer 2
IRR is discount rate that makes the net present value of all cash flows from a particular project equal to zero. We have assume different discount rates and find out IRR by trail and error method.
Suppose discount rate is 11.6355%
Years
Mfg cost saving
salvage value
Depreciation tax benefit
Initial cost
Working capital
Cashflow
Disc rate 11.6355%
Present value
Pre tax mfg cost * (1-tax rate)
Salvage value (1- tax rate)
Cost * tax rate * depre rate
A
B
C
D
E
F
G
F*G
A+B+C+D+E
0
0
0
0
-350000
-35000
-385000
1
-385000
1
66000
0
46662
0
0
112662
0.90
100919.51
2
66000
0
62230
0
0
128230
0.80
102892.80
3
66000
0
20734
0
0
86734
0.72
62342.24
4
66000
0
10374
0
0
76374
0.64
49174.08
5
66000
19800
0
0
35000
120800
0.58
69671.53
NPV
0
IRR
11.6355%
Answer : The project's IRR is 11.6355%
Figures in $
Years
Mfg cost saving
salvage value
Depreciation tax benefit
Initial cost
Working capital
Cashflow
Disc rate 13%
Present value
Pre tax mfg cost * (1-tax rate)
Salvage value (1- tax rate)
Cost * tax rate * depre rate
A
B
C
D
E
F
G
F*G
A+B+C+D+E
0
0
0
0
-350000
-35000
-385000
1
-385000
1
66000
0
46662
0
0
112662
0.88
99700.88
2
66000
0
62230
0
0
128230
0.78
100422.90
3
66000
0
20734
0
0
86734
0.69
60111.01
4
66000
0
10374
0
0
76374
0.61
46841.60
5
66000
19800
0
0
35000
120800
0.54
65565.40
NPV
-12358.20