New project analysis Holmes Manufacturing is considering a new machine that cost
ID: 2775899 • Letter: N
Question
New project analysis 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' marginal tax rate is 40%, and a 10% 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: 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
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?
Explanation / Answer
WACC 10% Tax Rate 40% Period 0 1 2 3 4 5 Machine Cost -260000 Pre tax Savings 90000 90000 90000 90000 90000 Tax Effect of Savings -36000 -36000 -36000 -36000 -36000 Depreciation Tax Savings 34320 46800 15600 7280 Working Capital -26000 26000 Salvage 24000 Taxes on Salvage Value -9600 Total Cash Flows -286000 88320 100800 69600 61280 94400 Present Value -286000 80290.91 83305.79 52291.51 41855.06 58614.97 Net Present Value $30,358.24 IRR 14.20% MIRR Cash Flow Values $ (286,000.00) 0 0 0 0 495877.6 MIRR 11.64% PayBack 4.48 If Savings 20% Lower Period 0 1 2 3 4 5 Machine Cost -260000 Pre tax Savings 72000 72000 72000 72000 72000 Tax Effect of Savings -28800 -28800 -28800 -28800 -28800 Depreciation Tax Savings 34320 46800 15600 7280 Working Capital -26000 26000 Salvage 24000 Taxes on Salvage Value -9600 Total Cash Flows -286000 77520 90000 58800 50480 83600 Present Value -286000 70472.73 74380.17 44177.31 34478.52 51909.02 Net Present Value ($10,582.26) If Savings 20% Higher Period 0 1 2 3 4 5 Machine Cost -260000 Pre tax Savings 108000 108000 108000 108000 108000 Tax Effect of Savings -43200 -43200 -43200 -43200 -43200 Depreciation Tax Savings 34320 46800 15600 7280 Working Capital -26000 26000 Salvage 24000 Taxes on Salvage Value -9600 Total Cash Flows -286000 99120 111600 80400 72080 105200 Present Value -286000 90109.09 92231.4 60405.71 49231.61 65320.92 Net Present Value $71,298.74