NEW PROJECT ANALYSIS MMG Manufacturing is considering a new machine that costs $300,000 and would reduce pretax manufacturing costs by $92,000 annually. Holmes would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $33,000 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 $30,000 initially, but it would be recovered at the end of the projects 5-year life. Holmess marginal tax rate is 35%, and a 11.0% WACC is appropriate for the project. a. Calculate the projects NPV , IRR , and MIRR . b. Assume management is unsure about the $92,000 cost savings this figure could deviate by as much as plus or minus 20%. What would the NPV be under each of these situations? Situation1 (cost saving increase by 20%): ; Situation2 (Cost savings decrease by 20%): ; Suppose the CFO wants you to do a scenario analysis with different values for the cost savings, the machines 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 0.25 $70,000 $26,000 $32,000 Base Case 0.50 $92,000 $33,000 $30,000 Best Case 0.25 $110,000 $40,000 $28,000 c. Calculate the projects expected NPV , its standard deviation, and its coefficient of variation. HINT: based on the answers you get in b: E(NPV)= P1*NPV1(scenario1) + P2*NPV2(scenario2) + P3*NPV3(Scenario3) d. Would you recommend that the project be accepted? Hint to question a. Please calculate the cash flows from the table below (90% of the answer is already provided to you), in order to be able to calculate NPV, IRR, MIRR, and payback period. 0 1 2 3 4 5 Capital expenditure ($300,000) NOWC -30,000 Cost savings $92,000 $92,000 $92,000 $92,000 $92,000 Depreciation $99,000.00 $135,000.00 $45,000.00 $21,000.00 $0.00 EBIT ($7,000) ($43,000) $47,000 $71,000 $92,000 Taxes (35%) -2,450 -15,050 16,450 24,850 32,200 EBIT(1 T) ($4,550) ($27,950) $30,550 $46,150 $59,800 Add: Depreciation $99,000.00 $135,000.00 $45,000.00 $21,000.00 $0.00 EBIT(1 T) + DEP xxx xxx xxx xxx xxx Return of NOWC $30,000 Salvage value 33,000 Tax on salvage value (35%) xxx Project cash flows xxx xxx xxx xxx xxx xxx