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 7.42%. 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. Enter negative answers with minus sign.

1. Calculatetheproject'sNPV.Roundyouranswertothenearestdollar.$
2. Calculatetheproject'sIRR.Roundyouranswertotwodecimalplaces.%
3. Calculatetheproject'sMIRR.Roundyouranswertotwodecimalplaces.%
4. Calculatetheproject'spayback.Roundyouranswertotwodecimalplaces.
5. Assumemanagementisunsureaboutthe$110,000costsavings-thisfigurecoulddeviatebyplus20%.
6. CalculatetheNPVoverthefive-yearperiod.Roundyouranswertothenearestdollar.$
7. CalculatetheNPVoverthefive-yearperiodifthisfigurecoulddeviatebyminus20%.Roundyouranswertothenearestdollar.$
8. SupposetheCFOwantsyoutodoascenarioanalysiswithdifferentvaluesforthecostsavings,themachine'ssalvagevalue,andtheworkingcapital(WC)requirement.Sheasksyoutousethefollowingprobabilitiesandvaluesinthescenarioanalysis:

   Scenario	Probability	Cost Savings	Salvage Value	WC
   Worstcase	0.35	$88,000	$28,000	$40,000
   Basecase	0.35	110,000	33,000	35,000
   Bestcase	0.30	132,000	38,000	30,000

9. Calculatetheproject'sexpectedNPV.Roundyouranswertothenearestdollar.$
10. Calculatetheproject'sstandarddeviation.Roundyouranswertothenearestdollar.$
11. Calculatetheproject'scoefficientofvariation.Roundyouranswertotwodecimalplaces.