# New Project Analysis

New Project Analysis

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 9% WACC is appropriate for the project.

\$
%
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Assume management is unsure about the \$110,000 cost savings – this figure could deviate by plus 20%. Calculate the NPV over the
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Calculate the NPV over the five-year period if this figure could deviate by minus 20%. Round your answer to the nearest dollar.
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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     0.30     \$ 88,000     \$28,000     \$40,000
Base case     0.40     110,000     33,000     35,000
Best case     0.30     132,000     38,000     30,000

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

New Project Analysis
You must evaluate the purchase of a spectrometer for the R&D department. The

base price is \$140,000, and it would cost another \$30,000 to modify the equipment

for special use by the firm. The equipment falls into the MACRS 3-year class and

would be sold after 3 years for \$60,000. The applicable depreciation rates are 33%,

45%, 15%, and 7% as discussed in Appendix 12A. The equipment would require an

\$8,000 increase in net operating working capital (spare parts inventory). The project

would have no effect on revenues, but it should save the firm

\$50,000 per year in before-tax labor costs. The firm%u2019s marginal federal-plus-state tax

rate is 40%.

a. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow?

b. What are the project%u2019s annual cash flows in Years 1, 2, and 3?

c. If the WACC is 12%, should the spectrometer be purchased? Explain.

a.

Cost of investment at t = 0:

Base price (140,000)

Modification (30,000)

Increase in NWC (8,000)

Cash outlay for new machine (178,000)

b.

Annual cash flows:

Year 1 Year 2 Year 3

After-tax savings

Depreciation tax savings

Salvage value

Tax on SV

Return of NWC

Project cash flows 0 0 0

c.

Year Cash Flow PV

0

1

2

3

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Holmes Manufacturing is considering a new machine that costs \$250,000 and would reduce pretax manufacturing costs by \$90,000 annually. Holmes would use the 3 Year
MACRS method to depreciate the machine, and management thinks the machine would have a value of \$23,000 at the end of its 5-year operating life. The applicable
depreciation rates are 33%, 45%, 15% and 7%. Net Operating working capital would increase by \$25,000 initially, but it would be recovered at the end of the
projects 5-year life. Holmes’s marginal tax rate is 40%, and a 10% WACC is appropriate for the project.

Calculate the projects NPV, IRR, MIRR and payback.

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Instructions:
The assignment is problem 12-22 on pp.428 and 429 of your text.
You are to answer parts a-e only
**The answer has 11 key outputs. **
Each will have a point value of 2 for a total of 22 points.
12-22 NEW PROJECT ANALYSIS – You must analyze a potential new productâa caulking compound that Cory Materials’ R&D people developed for use in the residential construction industry. Cory’s marketing manager thinks they can sell 115,000 tubes per year at a price of \$3.25 each for 3 years, after which the product will be obsolete. The required equipment would cost \$150,000, plus another \$25,000 for shipping and installation. Current assets (receivables and inventories) would increase by \$35,000, while current liabilities (accounts payable and accruals) would rise by \$15,000. Variable costs would be 60% of sales revenues, fixed costs (exclusive of depreciation) would be \$70,000 per year, and fixed assets would be depreciated under MACRS with a 3-year life. (Refer to Appendix 12A for MACRs depreciation rates.) When production ceases after 3 years, the equipment should have a market value of \$15,000. Cory’s tax rate is 40%, and it uses a 10% WACC for average-risk projects.
a. Find the required Year 0 investment and the project’s annual cash flows. Then calculate the project’s NPV, IRR, MIRR, and payback. Assume at this point that the project is of average risk.
e. Unrelated to the new product, Cory is analyzing two mutually exclusive machines that will upgrade its manufacturing plant. These machines are considered average-risk projects, so management will evaluate them at the firm’s 10% WACC. Machine X has a life of 4 years, while Machine Y has a life of 2 years. The cost of each machine is \$60,000; however, Machine X provides after-tax cash flows of \$25,000 per year for 4 years and Machine Y provides after-tax cash flows of \$42,000 per year for 2 years. The manufacturing plant is very successful, so the machines will be repurchased at the end of each…

Attachments:
FM.22-2-extra….docx

I have gotten the rest of the question excpet “in year 3” part…I am stuck here….? (the rest of it is correct, I have already checked it on our homework website.)

New project analysis

You must evaluate a proposed spectrometer for the R&D department. The base price is \$200,000, and it would cost another \$50,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for \$60,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an \$5,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm \$72,000 per year in before-tax labor costs. The firm’s marginal federal-plus-state tax rate is 40%.

What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
\$
What are the project’s annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent.
in Year 1 \$

in Year 2 \$

in Year 3 \$ ????
If the WACC is 14%, should the spectrometer be purchased?
-Select-yesnoItem 5