Question

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 12% cost of capital is appropriate for the project.

1. Calculate the project's NPV, IRR, MIRR, and payback. Do not round intermediate calculations. Round the monetary value to the nearest dollar and percentage values and payback to two decimal places. Negative values, if any, should be indicated by a minus sign.

   NPV: $  

   IRR:   %

   MIRR:   %

   The project's payback:  years

2. 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%.

   $  

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:

   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 project's expected NPV: $  

   Standard deviation: $  

   Coefficient of variation:

Answer 1

J K10 - I A B Cost 1 Year savings 2 0 3 1 $110,000 2 $110,000 3 $110,000 4 $110,000 5 $110,000 X fx =IRR(K2:K7) C D E F G H I Depreciati Net Depreciati Operating Net working on PBT Tax@40% income on cash flows capital $ 35,000 $ $ 116,655 $ -6,655 $ -2,662 $ -3,993 $ 116,655 $ 112,662 $ - $ 155,575 $ -45,575 $ -18,230 $ -27,345 $ 155,575 $ 128,230 $ $ 51,835 $ 58,165 $ 23,266 $ 34,899 $ 51,835 $ 86,734 $ $ 25,935 $ 84,065 $ 33,626 $ 50,439 $ 25,935 $ 76,374 $ $ - $ 110,000 $ 44,000 $ 66,000 $ - $ 66,000 $ 35,000 $ Investment -350,000 K Total cash flow $ -385,000 $ 112,662 $ 128,230 $ 86,734 $ 76,374 $ 120,800 L M PVIF@ 12% Present value 1.000 $ (385,000) 0.893 $ 100,591 0.797 $ 102,224 0.712 $ 61,736 0.636 $ 48,537 0.567 $ 68,545 19,800 =33000*(1-40%) $ (3,367) IRR 11.64% Net present value MIRR 11.80% =MIRR(K2:K7,12%,12%) Payback period 3.75 =3+57374/76374 Investment 350,000 | Cost Depreciati 17 Year savings on PBT Tax@40% 18 0 19 1 $132,000 $ 116,655 $ 15,345 $ 6,138 20 2 $132,000 $ 155,575 $ -23,575 $ -9,430 21 3 $132,000 $ 51,835 $ 80,165 $ 32,066 4 $132,000 $ 25,935 $ 106,065 $ 42,426 23 5 $132,000 $ - $ 132,000 $ 52,800 24 Net Depreciati Operating Net working income on cash flows capital $ -35,000 $ $ 9,207 $ 116,655 $ 125,862 $ $ -14,145 $ 155,575 $ 141,430 $ - $ 48,099 $ 51,835 $ 99,934 $ - $ 63,639 $ 25,935 $ 89,574 $ - $ 79,200 $ - $ 79,200 $ 35,000 $ Total cash flow $ -385,000 $ 125,862 $ 141,430 $ 99,934 $ 89,574 $ 134,000 PVIF@ 12% Present value 1.000 $ (385,000) 0.893 $ 112,377 0.797 $ 112,747 0.712 $ 71,131 0.636 $ 56,926 0.567 $ 76,035 19,800 =33000*(1-40%) Net present value with +20% deviation $ 44,216

Cost savings Depreciati Year on PBT on Investment -350,000 $ 1 $ 88,000 2 $ 88,000 3 $ 88,000 4 $ 88,000 5 $ 88,000 $116,655 $ 155,575 $ 51,835 $ 25,935 $ - $ -28,655 $ -67,575 $ 36,165 $ 62,065 $ 88,000 Net Depreciati Operating Net working Tax@40% income cash flows capital $ 35,000 $ -11,462 $ -17,193 $ 116,655 $ 99,462 $ $ -27,030 $ -40,545 $ 155,575 $ 115,030 $ - $ 14,466 $ 21,699 $ 51,835 $ 73,534 $ $ 24,826 $ 37,239 $ 25,935 $ 63,174 $ $ 35,200 $ 52,800 $ - $ 52,800 $ 35,000 Total cash flow $ -385,000 $ 99,462 $ 115,030 $ 73,534 $ 63,174 $ 107,600 PVIF@ 12% Present value 1.000$ (385,000)|| 0.893 $ 88,805 0.797 $ 91,701 0.712 $ 52,340 0.636 $ 40,148 0.567 $ 61,055 $ 19,800 =33000*(1-40%) Net present value with -20% deviation $50,950 Cost savings Year Investment 350,000 0 $ 1 $ 88,000 2 $ 88,000 3 $ 88,000 41 $ 88,000 5 $ 88,000 Depreciati Net Depreciati Operating Net working on PBT Tax@40% income on cash flows capital $ -40,000 $116,655 $ -28,555 $ -11,462 $ -17,193 $ 116,655 $ 99,462 $ $ 155,575 $ -67,575 $ -27,030 $ -40,545 $ 155,575 $ 115,030 $ $ 51,835 $ 36,165 $ 14,466 $ 21,699 | $ 51,835 $ 73,534 | $ $ 25,935 $ 62,065 $ 24,826 $ 37,239 $ 25,935 $ 63,174 | $ $ - $ 88,000 $ 35,200 $ 52,800 $ - $ 52,800 $ 40,000 Total cash flow $ -390,000 $ 99,462 $ 115,030 $ 73,534 $ 63,174 $ 109,600 PVIF@ 12% Present value 1.000 $ (390,000) 0.893 $ 88,805 0.797 $ 91,701 0.712 $ 52,340 0.636 $ 40,148 0.567 $ 62,190 $ 16,800 =28000*(1-40%) Worst Net present value -$54,815

Depreciati Oper PBT Tax@40% incoet $ Cost Depreciati Net Depreciati Operating | Net working Year savings on PBT Tax@40% income on cash flows capital | $ -35,000 1 $110,000 $116,655 $ -6,655 $ -2,662 $ -3,993 $ 116,655 $ 112,662 $ 2 $110,000 $ 155,575 $ -45,575 $ -18,230 $ -27,345 $ 155,575 $ 128,230 3 $110,000 $ 51,835 $ 58,165 $ 23,266 $ 34,899 $ 51,835 $ 86,734 $ 4 $110,000 $ 25,935 $ 84,065 $ 33,626 $ 50,439 $ 25,935 $ 76,374 $ 5 $110,000 $ - $ 110,000 $ 44,000 $ 66,000 $ - $ 66,000 $ 35,000 Total cash Investment flow 350,000 $ -385,000 $ 112,662 | $ 128,230 $ 86,734 $ 76,374 19,800 $ 120,800 =33000*(1-40%) PVIF@ 12% Present value 1.000 $ (385,000) 0.893 $ 100,591 0.797 $ 102,224 0.712 $ 61,736 0.636 $ 48,537 0.567 $ 68,545 $ Base Net present value $ (3,367) Investment -350,000 $ Cost Depreciati Net Depreciati Operating Net working Year savings on PBT Tax@40% income on cash flows capital 0 $ -30,000 1 $132,000 $ 116,655 $ 15,345 $ 6,138 $ 9,207 $ 116,655 $ 125,862 $ 2 $132,000 $ 155,575 $ -23,575 $ -9,430 $ -14,145 $ 155,575 $ 141,430 $ 3 $132,000 $ 51,835 $ 80,165 $ 32,066 $ 48,099 $ 51,835 $ 99,934 $ 4 $132,000 $ 25,935 $ 106,065 $ 42,426 $ 63,639 $ 25,935 $ 89,574 $ 5 $132,000 $ $ 132,000 $ 52,800 $ 79,200 $ - $ 79,200 $ 30,000 Total cash PVIF@ flow 12% Present value $ -380,000 1.000 $ (380,000) $ 125,862 0.893 $ 112,377 $ 141,430 0.797 $ 112,747 $ 99,934 0.712 $ 71,131 $ 89,574 0.636 $ 56,926 $ 132,000 0.567 $ 74,900 $ 22,800 =38000*(1-40%) Best Net present value $ 48,081

NPV (54,815) (3,367) 48,081 Probability [(P(r)] 0.35 0.35 0.30 Expecte NPV [rxP(r)=u] -$19,185 $1,178 $14,424 NPV- (48,876)] 2,572 54,021 | P(NPV)x(NPV- (NPV-)^2 u)^2 2,388,842,120.03 $ 836,094,742 6,617,291.19 $ 2,316,052 2,918,225,415.32 $ 875,467,625 Expected NPV $5,939 Variance (042) $ 1,713,878,419 Standard deviation (o) $ 41,399 Coefficient of variation Coefficient of variation Standard deviation:Mean -6.97 =41399/-5939

a) NPV IRR -$3,367 11.64% 11.80% 3.75 MIRR Payback b) NPV @ +20% NPV @ -20% $ 44,216 -$50,950 c) Expected NPV -$5,939 Standadard deviation $ 41,399 Coefficient of variation | -6.97

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