Madison Finance Assingment Help With Solution
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 11% WACC is appropriate for the project.
a. Calculate the project’s NPV. Round your answer to the nearest dollar.
Calculate the project’s IRR. Round your answer to two decimal places
Calculate the project’s MIRR. Round your answer to two decimal places
Calculate the project’s payback. Round your answer to two decimal places
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:
Scenario Probability Cost Savings Salvage Value WC Worst case 0.35 $ 88,000 $28,000 $40,000 Base case 0.35 110,000 33,000 35,000 Best case 0.30 132,000 38,000 30,000
d. 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
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DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate
rubber chickens with a newer, more efficient model. The old machine has a book value of $800,000 and a
remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but
DeYoung can sell it now to a Halloween mask manufacturer for $270,000. The old machine is being
depreciated by $160,000 per year, using the straight-line method.
The new machine has a purchase price of $1,160,000, an estimated useful life and MACRS class life of 5
years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total, an annual savings of $255,000 will be realized if the new machine is installed. The company’s marginal tax rate is 35%, and it has a 12% WACC.
a. What is the initial net cash flow if the new machine is purchased and the old one is replaced?
b. Calculate the annual depreciation allowances for both machines, and compute the change in the
annual depreciation expense if the replacement is made.
Depreciation Allowance, New Depreciation Allowance, Old Change in Depreciation
1 $ $ $
2 $ $ $
3 $ $ $
4 $ $ $
5 $ $ $
c. What are the incremental net cash flows in Years 1 through 5? Round your answers to the nearest
d. Should the firm purchase the new machine?
Product Code :Fin217
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