New project analysis Holmes Manufacturing is considering a new machine that cost
ID: 2655428 • Letter: N
Question
New project analysis
Holmes Manufacturing is considering a new machine that costs $230,000 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 $26,000 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 $24,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes' marginal tax rate is 40%, and a 12% WACC is appropriate for the project.
Calculate the project's NPV. Round your answer to the nearest cent.
$
Calculate the project's IRR. Round your answer to two decimal places.
%
Calculate the project's MIRR. Round your answer to two decimal places.
%
Calculate the project's payback. 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? 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:
Calculate the project's expected NPV, its standard deviation, and its coefficient of variation. Round your answers to two decimal places.
E(NPV) = $
NPV = $
CV =
Would you recommend that the project be accepted?
-Select-yes OR no
Explanation / Answer
New project analysis
Holmes Manufacturing is considering a new machine that costs $230,000 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 $26,000 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 $24,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes' marginal tax rate is 40%, and a 12% WACC is appropriate for the project.
Initial Investment = Machine Cost + Working Capital
Initial Investment = 230000+24000
Initial Investment = 254000
Terminal Value = Post Tax Salvage Value + working capital realised
Terminal Value = 26000*(1-40%) + 24000
Terminal Value = $ 39,600
Year 1 Operating Cash Flow = 90000*(1-40%) + 230000*33%*40%
Year 1 Operating Cash Flow = 84360
Year 2 Operating Cash Flow = 90000*(1-40%) + 230000*45%*40%
Year 2 Operating Cash Flow = 95400
Year 3 Operating Cash Flow = 90000*(1-40%) + 230000*15%*40%
Year 3 Operating Cash Flow =67800
Year 4 Operating Cash Flow = 90000*(1-40%) + 230000*7%*40%
Year 4 Operating Cash Flow =60440
Year 5 Operating Cash Flow = 90000*(1-40%)
Year 5 Operating Cash Flow =54000
Calculate the project's NPV. Round your answer to the nearest cent.
NPV = -Initial Investment + Year 1 Operating Cash Flow/(1+rate) + Year 2 Operating Cash Flow/(1+rate)^2 + Year 3 Operating Cash Flow/(1+rate)^3+ Year 4 Operating Cash Flow/(1+rate)^4+ Year 5 Operating Cash Flow/(1+rate)^5+ Terminal Value/(1+rate)^5
NPV = -254000 + 84360/1.12 + 95400/1.12^2 + 67800/1.12^3 + 60440/1.12^4 + 54000/1.12^5 + 39600/1.12^5
NPV = 37154
Calculate the project's IRR. Round your answer to two decimal places.
IRR = irr(values)
IRR = irr({-254000,84360,95400,67800,60440,93600})
IRR = 17.89%
Calculate the project's MIRR. Round your answer to two decimal places.
FV of Cash Flow = 84360*(1+12%)^4 + 95400*(1+12%)^3 + 67800*(1+12%)^2 + 60440*(1+12%)^1 + 54000 + 39600
FV of Cash Flow = 513,113.34
MIRR = (FV of Cash Flow/Initial Investment)^(1/5) - 1
MIRR = (513113.34/254000)^(1/5) - 1
MIRR = 15.10%
Calculate the project's payback. Round your answer to two decimal places.
Project's payback = 3 + 6440/60440
Project's payback = 3.11 Years
Year Cash Flow Cumulative 0 -254000 -254000 1 84360 -169640 2 95400 -74240 3 67800 -6440 4 60440 54000 5 93600 147600