The proposed machine costs $400 M and it will have a five year anticipated life and will be depreciated by using the 3-year

One of Fosbeck’s plants is trying to decide whether to automate its drug manufacturing by purchasing a fully automated bioreactor machine complex. The proposed machine costs $400 M and it will have a five year anticipated life and will be depreciated by using the 3-year MACRS depreciation method toward a zero salvage value. (MACRS depreciation rates are: Year 1: 33%, Year 2: 45%, Year 3: 15% and Year 4: 7%) However, the plant will be able to sell the machine in the after-market for 25% of its original costs at the end of year 5. The firm estimates that the installation of the bioreactor will bring annual costs savings of $50 M from reduced labor costs, $10 M per year from reduced waste disposal costs, and $80 M per year from the sales byproduct of bioreactor process net of selling expenses. Fosbeck requires a 12% of return from its investment and has a 38% marginal tax rate. Decision Criteria – NPV and IRR Calculate the NPV and IRR for the project. The manager of the plant raised some concerns about the revenues from the byproduct sale. He projects that the price of the byproduct in year 1 could be 10% to 50% less than what was projected. However, the savings from reduced labor costs and reduced waste disposal costs would remain same. He presented the following probability distribution on the projected reclaimed plastic sales: Remain same as projected 40% Decrease by 10% 30% Decrease by 30% 20% Decrease by 50% 10% Estimate the NPV and IRR for each of these scenarios. Estimate the expected NPV. Break-even Analysis At what volume of byproduct sales would Fosbeck have a break-even ?