Richardson Manufacturing Company is considering purchasing a machine that will cost $ 180,000. The machine is expected to have a useful life of 8 years, with no expected salvage value; however, for purposes of determining income tax depreciation, the machine qualifies as 7-year property. Management's best guess is that it will be able to sell 5,000 units of the new product each year, with a periodic standard deviation of 2,000 units. Annual sales are believed to be normally distributed; however, because the product is new, sales from year to year are expected to be perfectly correlated. The contribution margin from the sale of one unit is $18. To manufacture and distribute the product, annual fixed costs of $10,000 must be incurred. The company's weighted-average cost of capital is 12%, and the company is in the 40% income tax bracket.
Required:
With respect to the capital expenditure proposal, compute the following:
(1) The expected value of the periodic after-tax net cash flows and the after-tax cash flow value of the periodic standard deviation in monetary terms.
(2) The expected net present value of the capital expenditure proposal.
(3) The standard deviation of the expected net present value.
(4) The coefficient of variation.
(5) The probability that the net present value will exceed zero.