New-Project Analysis Madison Manufacturing is considering a new machine that cos
ID: 2707183 • 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 9% WACC is appropriate for the project.
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 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
Explanation / Answer
Requirement 1:
Compute each project