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. 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.

Step 1

Calculate the net present value under worst case as follows:

Step 2

Workings:

Step 3

Calculate the net present value u...

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