New-Project AnalysisMadison 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.    1. 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.$2. Suppose the CFO wants you to do a scenario analysis with different values for the cost savings, the machine's salvage value, and the working capital (WC) requirement. She asks you to use the following probabilities and values in the scenario analysis:ScenarioProbabilityCostSavingsSalvageValueWCWorst case0.35$  88,000$28,000$40,000Base case0.35110,00033,00035,000Best case0.30132,00038,00030,000Calculate the project's expected NPV. Round your answer to the nearest dollar.$ 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.

Question
Asked Oct 6, 2019
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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 10% cost of capital is appropriate for the project.

    

1. 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.
$



2. 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.

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Expert Answer

Step 1

As per the authoring guidelines, we should answer first question only if multiple questions posted under single question. Hence, I have answered the first question. Please repost the each question separately.

Step 2

Calculate the net present value if the pre-tax cost is $110,000 as follows:

P
G
Particulars
Year 1
Year 2
Year 3
Year 5
Year 0
Year 4
1
(350,000.00)
(35,000.00)
2 Initial cost
3 Net working capital
5 Pre-tax machine costs
110,000.00
25,935.00
110,000.00
110,000.00
110,000.00
110,000.00
6 Less: Depreciation
7 Earnings before tax
8 Less: Tax@ 40%
116,655.00
155,575.00
51,835.00
(6,655.00)
(2,662.00)
(3,993.00)
116,655.00
(45,575.00)
(18,230.00)
110,000.00
58,165.00
23,266.00
84,065.00
33,626.00
44,000.00
50,439.00
g Net income
(27,345.00)
34,899.00
66,000.00
10 Add: Depreciation
11 Add: After-tax salvage value
12 Add: Recovery of net working capital
155,575.00
51,835.00
25,935.00
19,800.00
35,000.00
(385,000.00
13 Operating cash flow
14 PV factors @ 10%
112,662.00
128,230.00
86,734.00
76,374.00
120,800.00
0.909090909090909 0.826446280991735 0.751314800901578 0.683013455365071 0.620921323059155
102.420.00
75,007.30
15 Present value
(385,000.00)
105,975.21
65,164.54
52,164.47
Net Present Value
15,732
16
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P G Particulars Year 1 Year 2 Year 3 Year 5 Year 0 Year 4 1 (350,000.00) (35,000.00) 2 Initial cost 3 Net working capital 5 Pre-tax machine costs 110,000.00 25,935.00 110,000.00 110,000.00 110,000.00 110,000.00 6 Less: Depreciation 7 Earnings before tax 8 Less: Tax@ 40% 116,655.00 155,575.00 51,835.00 (6,655.00) (2,662.00) (3,993.00) 116,655.00 (45,575.00) (18,230.00) 110,000.00 58,165.00 23,266.00 84,065.00 33,626.00 44,000.00 50,439.00 g Net income (27,345.00) 34,899.00 66,000.00 10 Add: Depreciation 11 Add: After-tax salvage value 12 Add: Recovery of net working capital 155,575.00 51,835.00 25,935.00 19,800.00 35,000.00 (385,000.00 13 Operating cash flow 14 PV factors @ 10% 112,662.00 128,230.00 86,734.00 76,374.00 120,800.00 0.909090909090909 0.826446280991735 0.751314800901578 0.683013455365071 0.620921323059155 102.420.00 75,007.30 15 Present value (385,000.00) 105,975.21 65,164.54 52,164.47 Net Present Value 15,732 16

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Step 3

Workings...

C
P
G
Year 0
Year 3
Particulars
Year
Year 2
Year 4
Year 5
-350000
2 Initial cost
3Net working capital
-35000
4
5 Pre-tax machine costs
6 Less: Depreciation
7 Earnings before tax
8 Less: Tax @ 40%
9 Net income
110000
- 350000*33.33%- 350000 *44.45%
|=D5-D6
=D7*40%
=D7-D8
=D6
110000
-350000 14.81%
-E5-E6
E7*40%
E7-ES
-E6
110000
-350000 7.41%
|=F5-F6
-F7 40%
- F7-FS
- F6
110000
110000
|-C5-C6
-C7 40%
- C 7 - CS
- C6
|-G5-G6
-G7 *40%
-G7-G8
-G6
-33000 (1-40%)
- 35000
-SUM(G9.G12)
- 1 / ( ( 1 + 10 % ) 5 )
|- G13 G14
|-SUM(B15: G15)
10 Add: Depreciation
11 Add: After-tax salvage value
12 Add: Recovery of net working capital
SUM(B2B12) -SUM(C9C12)
- 1 / ( ( 1 + 10 % ) 0 ) 1 / ( 1+ 10 % ) 1)
C13*C14
Net Present Value
- SUM(D9 D12 )
-SUM(E9E12 )
- 1 / ( (1 + 10 % ) ^ 3 )
-E13 *E14
- SUM( F9F12 )
|=1/((1+10%)^4)
-F13* F14
13 Operating cash flow
14 PV factors @ 10%
15 Present value
|= 1 /(1 +10 % ) 2)
=D13 D14
- B13 B14
16
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C P G Year 0 Year 3 Particulars Year Year 2 Year 4 Year 5 -350000 2 Initial cost 3Net working capital -35000 4 5 Pre-tax machine costs 6 Less: Depreciation 7 Earnings before tax 8 Less: Tax @ 40% 9 Net income 110000 - 350000*33.33%- 350000 *44.45% |=D5-D6 =D7*40% =D7-D8 =D6 110000 -350000 14.81% -E5-E6 E7*40% E7-ES -E6 110000 -350000 7.41% |=F5-F6 -F7 40% - F7-FS - F6 110000 110000 |-C5-C6 -C7 40% - C 7 - CS - C6 |-G5-G6 -G7 *40% -G7-G8 -G6 -33000 (1-40%) - 35000 -SUM(G9.G12) - 1 / ( ( 1 + 10 % ) 5 ) |- G13 G14 |-SUM(B15: G15) 10 Add: Depreciation 11 Add: After-tax salvage value 12 Add: Recovery of net working capital SUM(B2B12) -SUM(C9C12) - 1 / ( ( 1 + 10 % ) 0 ) 1 / ( 1+ 10 % ) 1) C13*C14 Net Present Value - SUM(D9 D12 ) -SUM(E9E12 ) - 1 / ( (1 + 10 % ) ^ 3 ) -E13 *E14 - SUM( F9F12 ) |=1/((1+10%)^4) -F13* F14 13 Operating cash flow 14 PV factors @ 10% 15 Present value |= 1 /(1 +10 % ) 2) =D13 D14 - B13 B14 16

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