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 12% cost of capital is appropriate for the project.

a.Calculate the project's NPV, IRR, MIRR, and payback.

b.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%.

  Calculate the NPV if cost savings value deviate by minus 20%.

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

d. Calculate the project's expected NPV, its standard deviation, and its coefficient of variation.