QUESTION 22

Madison Manufacturing is considering a new machine that costs $400,000 and would reduce pre-tax manufacturing costs by $120,000 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%, 44.55%, 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 25%, and a 11% cost of capital is appropriate for the project.

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

b. 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 $78,000 $30,000 $40,000

Base case 0.35 $120,000 $35,000 $35,000

Best case 0.3 $ 142,000 $38,000 $30,000

Calculate the project's expected NPV, its standard deviation, and its coefficient of variation.

Would you recommend that the project be accepted?

Upload the spreadsheet with answers, and the answers should be calculated by using the formulas in the spreadsheet.