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 25%, and a 12% cost of capital is appropriate for the project. Assume management is unsure about the $110,000 cost savings - this figure could deviate by as much as plus or minus 20%. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative values, if any, should be indicated by a minus sign. Calculate the NPV if cost savings value deviate by plus 20%. Calculate the NPV if cost savings value deviate by minus 20%. 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, its standard deviation, and its coefficient of variation. Do not round intermediate calculations. Round the monetary values to the nearest dollar and a coefficient of variation to two decimal places. Negative values, if any, should be indicated by a minus sign. The projects expected NPV Standard deviation coeffeicient of variation

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 13P

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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 25%, and a 12% cost of capital is appropriate for the project.

Assume management is unsure about the $110,000 cost savings - this figure could deviate by as much as plus or minus 20%. Do not round intermediate calculations. Round your answer to the nearest dollar. Negative values, if any, should be indicated by a minus sign.

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

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

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, its standard deviation, and its coefficient of variation. Do not round intermediate calculations. Round the monetary values to the nearest dollar and a coefficient of variation to two decimal places. Negative values, if any, should be indicated by a minus sign.

The projects expected NPV

Standard deviation

coeffeicient of variation

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