Problem 12-14 New project analysis Holmes Manufacturing is considering a new mac
ID: 2734694 • Letter: P
Question
Problem 12-14
New project analysis
Holmes Manufacturing is considering a new machine that costs $270,000 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 $22,000 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 $21,000 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. $
Problem 12-14
New project analysis
Holmes Manufacturing is considering a new machine that costs $270,000 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 $22,000 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 $21,000 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. $
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-yesnoItem 10
Explanation / Answer
Answer:1 NPV:
Answer:IRR
Answer:3 MIRR:
Answer:4 Payback period:
Payback period=3 years+28560/61560
=3.46 years
Year 0 1 2 3 4 5 Investment outlays: Machine -270000 Working capital -21000 Operating cash flows: Revenue 90000 90000 90000 90000 90000 Dep 89100 121500 40500 18900 0 EBIT 900 -31500 49500 71100 90000 Taxes 360 -12600 19800 28440 36000 NOPAT 540 -18900 29700 42660 54000 Dep 89100 121500 40500 18900 0 Operating cash flow 89640 102600 70200 61560 54000 Terminal cash Flow Return of working capital 21000 Net salvage value 13200 Net cash flow -291000 89640 102600 70200 61560 88200 Discount rate 12% NPV 9964