4th Time Posting Same qusetion: Problem 11-12 New-Project Analysis Madison Manuf

Question

4th Time Posting Same qusetion:

Problem 11-12
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 7.41%. 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 40%, and a 13% WACC is appropriate for the project.

A)

Calculate the project's NPV. Round your answer to the nearest dollar.
$    -->correct
Calculate the project's IRR. Round your answer to two decimal places
      % -->correct
Calculate the project's MIRR. Round your answer to two decimal places
      % -->correct
Calculate the project's payback. Round your answer to two decimal places
       -->Wrong

B) Assume management is unsure about the $110,000 cost savings - this figure could deviate by plus 20%. Calculate the NPV over the five-year period. Round your answer to the nearest dollar.
$    
Calculate the NPV over the five-year period if this figure could deviate by minus 20%. Round your answer to the nearest dollar.
$   

C )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:

Calculate the project's expected NPV. Round your answer to the nearest dollar.
$    
Calculate the project's standard deviation. Round your answer to the nearest dollar.
$    
Calculate the project's coefficient of variation. Round your answer to two decimal places

NOTE: Please someone give me right answer, I am posting same question 4th time; please reply if correct answer dont post spam.

Scenario
Probability Cost
Savings Salvage
Value
WC Worst case 0.25 $  88,000 $28,000 $40,000 Base case 0.45 110,000 33,000 35,000 Best case 0.30 132,000 38,000 30,000

Explanation / Answer

MADISON MANUFACTURING: Initial investment: cost of the machine 350000 investment in net working capital 35000 385000 Annual operating cash flows: 1 2 3 4 5 savings in pretax manufacturing costs 110000 110000 110000 110000 110000 less: depreciation 116655 155575 51835 25935 0 incremental income before tax -6655 -45575 58165 84065 110000 tax @ 40% -2662 -18230 23266 33626 44000 incremental income after tax -3993 -27345 34899 50439 66000 add: depreciation 116655 155575 51835 25935 0 112662 128230 86734 76374 66000 PVIF @ 13% 0.8850 0.7831 0.6931 0.6133 0.5428 PV 99701 100423 60111 46842 35822 Sum of PVs of operational cash inflows 342899 Terminal cash flows: salvage value 33000 less: tax @ 40% on capital gains (0.4 * 33000 - 0) 13200 Net after tax salvage value 19800 Release of NWC 35000 54800 pvif @ 13% 0.5428 PV of terminal cash flows 29743 A) NPV of the project: PV of operational cash flows 342899 PV of terminal cash flows 29743 PV of inflows 372642 Initial investment 385000 NPV -12358 IRR of the project: operational cash inflows 112662 128230 86734 76374 66000 terminal cash inflow 54800 annual cash inflows 112662 128230 86734 76374 120800 pvif @ 12% 0.8929 0.7972 0.7118 0.6355 0.5674 PV 100591 102224 61736 48537 68545 381633 pvif @ 11% 0.9009 0.8116 0.7312 0.6587 0.5935 PV 101497 104074 63419 50310 71689 390990 IRR = 11% + 5990/9357 = 11.64% Check: PVIF @ 11.64% 0.89574 0.80234 0.71869 0.64376 0.57663 PV 100915 102885 62335 49166 69657 384958 PV of cash inflows close to initital investment. MIRR: Annual cash inflows 112662 128230 86734 76374 120800 FVIF @ 13% 1.6305 1.4429 1.2769 1.1300 1.0000 FV 183692 185023 110751 86303 120800 Cumulative future value 686568 MIRR =5686568/385000 - 1 = 0.12265 12.27% Payback: annual cash inflows 112662 128230 86734 76374 120800 cumulative cash inflows 112662 240892 327626 404000 524800 Pay back = 3 + (385000-327626)/76374 3.75 Years B) Cost savings +20% Annual operating cash flows: 1 2 3 4 5 savings in pretax manufacturing costs 132000 132000 132000 132000 132000 less: depreciation 116655 155575 51835 25935 0 incremental income before tax 15345 -23575 80165 106065 132000 tax @ 40% 6138 -9430 32066 42426 52800 incremental income after tax 9207 -14145 48099 63639 79200 add: depreciation 116655 155575 51835 25935 0 125862 141430 99934 89574 79200 PVIF @ 13% 0.8850 0.7831 0.6931 0.6133 0.5428 PV 111382 110760 69259 54937 42987 Sum of PVs of operational cash inflows 389326 NPV of the project: PV of operational cash flows 389326 PV of terminal cash flows 29743 PV of inflows 419069 Initial investment 385000 NPV 34069 Cost savings - 20% Annual operating cash flows: 1 2 3 4 5 savings in pretax manufacturing costs 88000 88000 88000 88000 88000 less: depreciation 116655 155575 51835 25935 0 incremental income before tax -28655 -67575 36165 62065 88000 tax @ 40% -11462 -27030 14466 24826 35200 incremental income after tax -17193 -40545 21699 37239 52800 add: depreciation 116655 155575 51835 25935 0 99462 115030 73534 63174 52800 PVIF @ 13% 0.8850 0.7831 0.6931 0.6133 0.5428 PV 88019 90085 50963 38746 28658 Sum of PVs of operational cash inflows 296471 NPV of the project: PV of operational cash flows 296471 PV of terminal cash flows 29743 PV of inflows 326214 Initial investment 385000 NPV -58786 C) Cost savings +20% Annual operating cash flows: 1 2 3 4 5 savings in pretax manufacturing costs 132000 132000 132000 132000 132000 less: depreciation 116655 155575 51835 25935 0 incremental income before tax 15345 -23575 80165 106065 132000 tax @ 40% 6138 -9430 32066 42426 52800 incremental income after tax 9207 -14145 48099 63639 79200 add: depreciation 116655 155575 51835 25935 0 125862 141430 99934 89574 79200 PVIF @ 13% 0.8850 0.7831 0.6931 0.6133 0.5428 PV 111382 110760 69259 54937 42987 Sum of PVs of operational cash inflows 389326 Initial investment: cost of the machine 350000 investment in net working capital 30000 380000 Terminal cash flows: salvage value 38000 less: tax @ 40% on capital gains (0.4 * 38000 - 0) 15200 Net after tax salvage value 22800 Release of NWC 30000 52800 pvif @ 13% 0.5428 PV of terminal cash flows 28660 NPV of the project: PV of operational cash flows 389326 PV of terminal cash flows 28660 PV of inflows 417986 Initial investment 380000 NPV 37986 Cost savings +20% Annual operating cash flows: 1 2 3 4 5 savings in pretax manufacturing costs 88000 88000 88000 88000 88000 less: depreciation 116655 155575 51835 25935 0 incremental income before tax -28655 -67575 36165 62065 88000 tax @ 40% -11462 -27030 14466 24826 35200 incremental income after tax -17193 -40545 21699 37239 52800 add: depreciation 116655 155575 51835 25935 0 99462 115030 73534 63174 52800 PVIF @ 13% 0.8850 0.7831 0.6931 0.6133 0.5428 PV 88019 90085 50963 38746 28658 Sum of PVs of operational cash inflows 296471 Initial investment: cost of the machine 350000 investment in net working capital 40000 390000 Terminal cash flows: salvage value 28000 less: tax @ 40% on capital gains (0.4 * 28000 - 0) 11200 Net after tax salvage value 16800 Release of NWC 40000 56800 pvif @ 13% 0.5428 PV of terminal cash flows 30831 NPV of the project: PV of operational cash flows 296471 PV of terminal cash flows 30831 PV of inflows 327302 Initial investment 390000 NPV -62698 deviation Square of Square dev SCENARIO ANALYSIS: Scenario Probability NPV NPV*p from mean deviations * p worse case 0.25 -62698 -15675 -52858 2793968164 698492041 base case 0.45 -12358 -5561 -2518 6340324 2853146 best case 0.30 37986 11396 47826 2287326276 686197883 -9840 5087634764 1387543070 Expected NPV = -$9840 Standard Deviation = 1387543070 = $ 37250 Coefficient of variation = Std dev/Mean = 37250/-9840 = -3.79

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