Question

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 11% 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.

Answer 1

Clipboard Font Alignment Number Styles fix O22 A D E G Н 1 Solution:- (A) 2 Years 0 1 2 4 3 Initial Investment ($350,000) 4 working Capital Invested ($35,000) Cost Reduction 5 110000 110000 110000 110000 110000 6 Less- Dep $0.00 116,655.00 155,575.00 51,835.00 25,935.00 7 Income (6,655.00) (45,575.00) 58,165.00 84,065.00 110,000.00 8 Tax Saving @40 % ($2,662.00) ($18,230.00) 9 Таx Expense $23,266.00 $33,626.00 $44,000.00 10 Income After Tax (3,993.00) (27,345.00) 34,899.00 50,439.00 66,000.00 11 Add- Dep $116,655.00 $155,575.00 $51,835.00 $25,935.00 $0.00 $86,734.00 12 Cash Flow $112,662.00 $128,230.00 $76,374.00 $66,000.00 13 Working Capital $35,000 14 After tax Salvage Value $19,800 15 Net Cash flow ($385,000) $112,662 $128,230 $86,734 $76,374 $120,800 16 PVF 11% 0.901 1.00 0.901 0.901 0.901 0.901 17 PV ($385,000) $101,497 $115,523 $78,139 $68,805 $108,829 $87,793 18 NPV Sum of PV of Cashflows 19 20 Year 1 2 4. 7.41% 44.45% 21 Dep rate 33.33% 14.81% 22 Machine Cost 350,000.00 350,000.00 350,000.00 350,000.00 23 Dep Expense 116,655.00 155,575.00 51,835.00 25,935.00 24 25 Salvage Value $33,000 26 Tax on Salvage 40%33000 $13,200 $19,800 27

fix G5 A E 1 (B) Cashflow 2 Year 0 -385000 4 1 112662 5 128230 6 3 86734 7 76374 5 120800 9 11.64% 10 IRR IRR(B3:B8) 11 12 13 (C) Cashflow 14 Year Cumm CF 15 0 -385000 112662 16 1 112662 17 2 128230 240892 327626 18 3 86734 404000 19 76374 524800 120800 20 5 21. 3+(385000-327626) / (76374) 22 PBP 3.75 Years 23. et LO o

F19 61/6H= C Е F G Н 1 (D) Cashflow PVF of -ve CF Cashflow FVF of +ve CF 2 Year Year FV PV -385000 3 0 -385000 1 -385000 1 112662 1 112662 1.518 171020.916 128230 5 2. 128230 1.367 175290.41 6 86734 86734 1.232 106856.288 76374 76374 1.11 7 4 84775.14 5 120800 5 120800 1 120800 Total 385000 658742.75 10 [(FV of +ve CF) /(PV of -Ve CF) ]^1/n - 1 11 MIRR [658742.75/385000]^1/5 - 1 12 [1.711]^1/5- 1 13 14 O st st LO LON

MIRR = [ 1.711 ]^1/5 - 1

MIRR = 1.1134 - 1 = 0.1134 =  11.34%

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