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 10% cost of capital is appropriate for the project. Calculate the project’s NPV, IRR, MIRR, and payback. Assume management is unsure about the $110,000 cost savings—this figure could deviate by as much as plus or minus 20%. What would the NPV be under each of these extremes? 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: Calculate the project’s expected NPV, its standard deviation, and its coefficient of variation. Would you recommend that the project be accepted?
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 10% cost of capital is appropriate for the project. Calculate the project’s NPV, IRR, MIRR, and payback. Assume management is unsure about the $110,000 cost savings—this figure could deviate by as much as plus or minus 20%. What would the NPV be under each of these extremes? 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: Calculate the project’s expected NPV, its standard deviation, and its coefficient of variation. Would you recommend that the project be accepted?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Madison Manufacturing is considering a new machine that costs $350,000 and would reduce pre-tax
- Calculate the project’s NPV, IRR, MIRR, and payback.
- Assume management is unsure about the $110,000 cost savings—this figure could deviate by as much as plus or minus 20%. What would the NPV be under each of these extremes?
- 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:
Calculate the project’s expected NPV, its standard deviation, and its coefficient of variation. Would you recommend that the project be accepted?
Transcribed Image Text:Scenario
Worst case
Base case
Best case
Probability
0.35
0.35
0.30
Cost Savings
$ 88,000
110,000
132,000
Salvage Value
$28,000
33,000
38,000
WC
$40,000
35,000
30,000
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Hi,
What is the full equation or data points used for the IRR? The last part is cut off. I have attached a highlighted image for reference.
Thank you
![1
2
Inputs
3 Cost of new machine
4 Investment in Working Capital
5 Savings in pre tax costs.
6 Salvage Value
7 Depreciation
8 MACRS-5 year
9
10
Marginal Tax Rate
Required Rate of return
11
12 Computing the cashflows
13 Period
14 Savings in pre tax costs
15 Depreciation
16 Salvage Value
17 EBIT
18 Taxes
19 Operating Cash Flows
20 Initial investment
21 Investment in working capital
22 Recovery of working capital
23 Cash Flows
24
25 NPV
26 PVIF @10%
27 PV of cash flows.
28 NPV
29
30 IRR
31 PVIF @ 14%
32 PV of cash flows
33 NPV
34 PVIF @ 14%
35 PV of cash flows.
36 NPV
37 IBB
38
39 MIRR
40 FVIF @10%
41 PVIF @10%
42
FV of cash inflows
43 PV of cash outflows
44 MIRR
45
46 Payback period
47 Cumulative Cash flows
48 Years before break even
49 Unrecovered Amount
50 Cash flow in year of recovery
51 Payback period in years
52
13 Parind
B
350000
35000
110000
33000
0.25
0.1
=SUM[D27:127]
0.13
=SUM(D32:132)
0.14
=SUM(D35:135)
C
C31+C33-0Y[C33-C3611"
0.1
=SUM(D42:142)
=SUM(D43:143)
=[[C42-C43)^(85))-1
3
=H47
=H23
=C48+(C49/C50)
0
=C3
=C4
D
=((1+$C$31)^D13)
=D31 D23
0.3333
E
=((1+C40)^D13)
=D41 D23
=D23
1
=$C5
=$C$3*E8
=E14-E 15+E 16
=E17*$C$9
=E17+E 15-E 18
0.4445
F
2
=$C5
=$C$3*F8
=F14-F15+F16
=F17 $C$9
=F17+F15-F18
=(1+$C$40)^E13
=E40 E23
=D47+E23
0.1481
G
3
=$C5
= $C$3*G8
= (1+$C$40)^F13
=F40 F23
=G14-G15+ G16
=G17*$C$9
=G17+ G15-G18
=E47+F23
0.0741
=D19-D20-D21+ D2 =E19-E20-E21+ =F19-F20-F21+1=G19-G20-G21+=H19-H20-H21+ =119-120-121+122
H
=((1+$C$10)^D13) =((1+$C$10)^E 13 =1[[1+$C$10)^F13] =((1+$C$10)^G13 = 1((1+$C$10)^H13 = ((1+$C$10)^113)
=D26 D23
=E26 E23
=F26*F23
=G26*G23
=H26 H23
=126*123
4
=$C5
=$C$3H8
=H14-H15+H16
=H17 $C$9
H17+H15-H18
=((1+$C$34) D13) =((1+$C$34)^E 13 =((1+$C$34)^F13 = ((1+$C$34)^G13 = ((1+$C$34)^H13 = ((1+$C$34)^113)
=D34 D23
=E34 E23
=F34 F23
=G34 G23
=H34 H23
=134*123
=F47+G23
5
=$C5
=((1+$C$31)^E 13 =1[[1+$C$31)^F13] = 1((1+$C$31)^G13 = 1((1+$C$31)^H13 = ((1+$C$31)^113)
=E31*E23
=F31 F23
=G31*G23
=H31*H23
=131 123
I
=C6
=114-115+116
=117*$C$9
=117+115-118
=C4
=G47+H23
= (1+$C$40)^G13 =(1+$C$40)^H13__ =(1+$C$40)^113
-G40 G23
=H40 H23
=140*123
=H47+123](https://content.bartleby.com/qna-images/question/39a3c736-9ddc-4e0f-8f91-81643637c317/701a16d1-567d-4aa8-a165-da2a3abeae9e/lra76gm_processed.jpeg)
Transcribed Image Text:1
2
Inputs
3 Cost of new machine
4 Investment in Working Capital
5 Savings in pre tax costs.
6 Salvage Value
7 Depreciation
8 MACRS-5 year
9
10
Marginal Tax Rate
Required Rate of return
11
12 Computing the cashflows
13 Period
14 Savings in pre tax costs
15 Depreciation
16 Salvage Value
17 EBIT
18 Taxes
19 Operating Cash Flows
20 Initial investment
21 Investment in working capital
22 Recovery of working capital
23 Cash Flows
24
25 NPV
26 PVIF @10%
27 PV of cash flows.
28 NPV
29
30 IRR
31 PVIF @ 14%
32 PV of cash flows
33 NPV
34 PVIF @ 14%
35 PV of cash flows.
36 NPV
37 IBB
38
39 MIRR
40 FVIF @10%
41 PVIF @10%
42
FV of cash inflows
43 PV of cash outflows
44 MIRR
45
46 Payback period
47 Cumulative Cash flows
48 Years before break even
49 Unrecovered Amount
50 Cash flow in year of recovery
51 Payback period in years
52
13 Parind
B
350000
35000
110000
33000
0.25
0.1
=SUM[D27:127]
0.13
=SUM(D32:132)
0.14
=SUM(D35:135)
C
C31+C33-0Y[C33-C3611"
0.1
=SUM(D42:142)
=SUM(D43:143)
=[[C42-C43)^(85))-1
3
=H47
=H23
=C48+(C49/C50)
0
=C3
=C4
D
=((1+$C$31)^D13)
=D31 D23
0.3333
E
=((1+C40)^D13)
=D41 D23
=D23
1
=$C5
=$C$3*E8
=E14-E 15+E 16
=E17*$C$9
=E17+E 15-E 18
0.4445
F
2
=$C5
=$C$3*F8
=F14-F15+F16
=F17 $C$9
=F17+F15-F18
=(1+$C$40)^E13
=E40 E23
=D47+E23
0.1481
G
3
=$C5
= $C$3*G8
= (1+$C$40)^F13
=F40 F23
=G14-G15+ G16
=G17*$C$9
=G17+ G15-G18
=E47+F23
0.0741
=D19-D20-D21+ D2 =E19-E20-E21+ =F19-F20-F21+1=G19-G20-G21+=H19-H20-H21+ =119-120-121+122
H
=((1+$C$10)^D13) =((1+$C$10)^E 13 =1[[1+$C$10)^F13] =((1+$C$10)^G13 = 1((1+$C$10)^H13 = ((1+$C$10)^113)
=D26 D23
=E26 E23
=F26*F23
=G26*G23
=H26 H23
=126*123
4
=$C5
=$C$3H8
=H14-H15+H16
=H17 $C$9
H17+H15-H18
=((1+$C$34) D13) =((1+$C$34)^E 13 =((1+$C$34)^F13 = ((1+$C$34)^G13 = ((1+$C$34)^H13 = ((1+$C$34)^113)
=D34 D23
=E34 E23
=F34 F23
=G34 G23
=H34 H23
=134*123
=F47+G23
5
=$C5
=((1+$C$31)^E 13 =1[[1+$C$31)^F13] = 1((1+$C$31)^G13 = 1((1+$C$31)^H13 = ((1+$C$31)^113)
=E31*E23
=F31 F23
=G31*G23
=H31*H23
=131 123
I
=C6
=114-115+116
=117*$C$9
=117+115-118
=C4
=G47+H23
= (1+$C$40)^G13 =(1+$C$40)^H13__ =(1+$C$40)^113
-G40 G23
=H40 H23
=140*123
=H47+123
Solution
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