Holmes Manufacturing is considering a new machine that costs $250,000 and would

Question

Holmes Manufacturing is considering a new machine that costs $250,000 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 $23,000 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 $25,000 initially, but it would be recovered at the end of the projects 5-year life. Holmes's marginal tax rate is 40%, and a 10% WACC is appropriate for the project.

Calculate the projects NPV, IRR, MIRR and payback.

Explanation / Answer

TCO 8) Leekee Shipyards has a new barnacle removing product for ocean going vessels. The company invests $1,200,000 in operating assets and plans to produce and sell 400,000 units per year. Leekee wants to make a return on investment of 20% each year. Leekee needs to know what price to charge for this product.

Use the absorption costing approach to determine the markup necessary to make the desired return on investment based on the following information:

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