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.
2. Assume management is unsure about the $110,000 cost savings - this figure could deviate by as much as plus or minus 20%. Calculate the NPV if cost savings value deviate by plus 20%. Round your answer to the nearest dollar.
Calculate the NPV if cost savings value deviate by minus 20%. Round your answer to the nearest dollar.
3. Suppose the CFO wants you to do a scenario analysis with different values for the cost savings, the machine's salvage value, and the working capital (WC) requirement. She asks you to use the following probabilities and values in the scenario analysis:
|Worst case||0.35||$ 88,000||$28,000||$40,000|
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.
As per the guidelines, we can answer the first question as it has multiple sub-parts. Request you to repost the question mentioning which parts to answer for our experts to answer them.
Project analysis is important to understand if the project would be of benefit to the organization or not. This is the reason why Net Present Value (NPV), Internal rate of return (IRR), Modified Internal rate of return (MIRR) and Payback period is used.
Operating cash flow of the project is first determined followed by calculating the NPV, IRR, MIRR and payback period of a project
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