ISBN-13: 978-1-111-97221-9

Madison Manufacturing is considering a new machine that cost $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 7.42%, as discussed in Appendix 11A. 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% WACC is appropriate for the project.

a. Calculate the project's NPV, IRR MIRR and payback.

b. 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 theses extremes?

I like to start by setting up a timeline. I'm a visual learner

	0	1	2	3	4	5
	-350000	35000	110000	110000	110000	110000

I like to start by setting up a timeline