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1. Sha Industries is considering a proposed project for its capital budget. The company estimates the project's NPV IS $12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The company's CFO, however, forecasts there is only a 50% chance that the economy will be average Recognizing this uncertainty. She has also performed the following scenario analysis Economie Scenario Probability of Outcome NPV million) Recession 0.05 S70 0.20 525 Above average 0.20 $20 005 What is the project's expected NPV, its standard deviation, and its coefficient of variation? Expected NPV- Standard Deviation Coeficient of Variation 2. 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 year MACRS method te depreciate the machine, and management things 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% 14.1% and 7.41% Working capital would increase by $35.000 in but would be recovered at the end of the projects 5 year Madison's marginal tax rate is 40% and a 10%. WACC appropriate for the project Caleate the projects PV, RRMIRR and payback Input Data Machine cost Networking capital Cost savings Salvage value Tax rate WACC Depreciation Schedule Depreciation rate Depreciation Remaining Book Value Salvage CF Salvage value Book value Tax on salvage value Salvage CF Cash Flow Forecast Machine cost Networking capital Before ansavings Depreciation EET 13-1 13-2 D E F EBT-T) Add depreciation Net Operating CF Return of NWC Salvage CF Net Cash Flow Key Result NPV IRR - Cumulative CF Payback b. Assume management is unsure about the $110.000 cost savings this figure could deviate by as much as plus or minus 20%. What would the NPV be under each of these extremes? NPV - % Deviation Cost savings 20% -20% 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 WC Probability 0.35 Worst case $40,000 Cost Savings $88.000 110,000 132.000 Salvage Value $28.000 33,000 38,000 0.35 35,000 Best case 30.000 Calculate the project's expected NPV, its standard deviation, and its coefficient of variation. Would you recommend that the project be accepted? NPY- IRR - MIRR Cumulative CF Payback b. Assume management is unsure about the $110,000 cost savings--this figure could deviate by as much as plus or minus 20%. What would the NPV be under each of these extremes? Deviation 20% -20% . 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 the following probabilities and values in the scenario analysis: Scenario WC Worst case Base case Probability 0.35 0.35 Cost Savings $85,000 110,000 132.000 Salvage Value 320.000 33.000 38.000 $40.000 35.000 30.000 Best case Calculate the project's expected NPV, its standard deviation, and its coeficient of variation. Would you recommend that the project be accepted? Probability Scenario Worst case Base case Best case Expected NPV = Standard Deviation Coefficient of Variation =

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