Thomson Manufacturing is considering a new machine that costs $250,000 and would reduce pre-tax manufacturing costs by $90,000 annually. The company would use the 3-year MACRS method to depreciate the machine, and the applicable depreciation rates would be 33%, 45%, 15%, and 7%. The management thinks the machine would have a value of $23,000 at the end of its 5-year operating life. The company estimates that current assets would increase by $ 35,000 and payables increase by $10,000 initially, but the increase of the net working capital would be recovered at the end of projects 5-year life. The companys WACC is 10% and marginal tax rate is 40%.

Calculate the initial year (i.e. Year 0) project cash flow.

Calculate the annual depreciation charges.

Calculate the projects annual operating cash flows.

Calculate the terminal year cash flow.

Calculate the projects NPV, IRR, and MIRR. If the project is of average risk, should the project be accepted?

Suppose the CFO is unsure about the cost saving and the machines salvage value. She asks you to use the following probability distribution of NPV to study the projects risk. Would you recommend the project be accepted? Explain with your calculations of the projects risk.

Scenario	Probability	NPV
Worse	35%	-7,664
Base	35%	37,035
Best	30%	81,734