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
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.
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.
depreciation rates are 33, 45, 15, and 7 percent as discussed in Appendix 12A.
would increase by $25,000 initially, but it would be recovered at the end of the project’s 5-year
Holmes’ marginal tax rate is 40 percent, and a 10 percent WACC is appropriate for the
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.
you to use the following probabilities and values in the scenario analysis:
Calculate the project’s expected NPV, its standard deviation, and its coefficient of variation.