Tut09q - Sept 13, 2009 Strictly for course AB102 (2009)...

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Sept 13, 2009 Strictly for course AB102 (2009) internal circulation only. Nanyang Business School AB102 Financial Management Tutorial 9: Cash Flow Estimation and Risk Analysis (Common Questions) 1) (12-10) New project analysis . Holmes Manufacturing is considering a new machine that costs $250,000 and would reduce pre-tax 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 percent as discussed in Appendix 12A. Working capital would increase by $25,000 initially, but it would be recovered at the end of the project’s 5-year life. Holmes’ marginal tax rate is 40 percent, and a 10 percent WACC is appropriate for the project. a) Calculate the project’s NPV b) 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 NOWC Worst case 0.35 $72,000 $18,000 $30,000 Base case 0.35 90,000 23,000 25,000 Best case 0.30 108,000 28,000 20,000 Calculate the project’s expected NPV, its standard deviation, and its coefficient of variation.
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Tut09q - Sept 13, 2009 Strictly for course AB102 (2009)...

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