In: Finance
Problem 11-12
New-Project Analysis
Madison Manufacturing is considering a new machine that costs
$350,000 and would...
Problem 11-12
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 10% cost of capital is appropriate
for the project.
- 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
places.
- Assume management is unsure about the $110,000 cost savings -
this figure could deviate by as much as plus or minus 20%.
Calculate the NPV if cost savings value deviate by plus 20%. Round
your answer to the nearest dollar.
$
Calculate the NPV if cost savings value 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 |
0.35 |
$ 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 |
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.