Question
Holmes Manufacturing is considering a new machine that costs $260,000 and would reduce pretax manufacturing costs by $90,000 annually. Holmes would use the 3-year MACRS
Holmes Manufacturing is considering a new machine that costs $260,000 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 $24,000 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 $26,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes's marginal tax rate is 40%, and a 10% WACC is appropriate for the project.
- Calculate the project's NPV. Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest cent. $ Calculate the project's IRR. Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the project's MIRR. Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the project's payback. Do not round intermediate calculations. Round your answer to two decimal places. years
- Assume management is unsure about the $90,000 cost savings-this figure could deviate by as much as plus or minus 20%. What would the NPV be under each of these situations? Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest cent. 20% savings increase: $ 20% savings decrease: $
- Suppose the CFO wants you to do a scenario analysis with different values for the cost savings, the machine's salvage value, and the net operating working capital (NOWC) 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 $19,000 $31,000 Base case 0.35 $90,000 $24,000 $26,000 Best case 0.30 $108,000 $29,000 $21,000
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started