New project analysis Holmes Manufacturing is considering a new machine that cost

Question

New project analysis

Holmes Manufacturing is considering a new machine that costs $240,000 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 $25,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes' marginal tax rate is 40%, and a 11% WACC is appropriate for the project.

Calculate the project's NPV. Round your answer to the nearest cent.
$   {C}

Calculate the project's IRR. Round your answer to two decimal places.
%

Calculate the project's MIRR. Round your answer to two decimal places.
{C}%

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-yesnoItem 10

Scenario Probability Cost Savings Salvage Value NOWC Worst case 0.35 $72,000 $19,000 $30,000 Base case 0.35 $90,000 $24,000 $25,000 Best case 0.30 $108,000 $29,000 $20,000

Explanation / Answer

New project analysis

Holmes Manufacturing is considering a new machine that costs $240,000 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 $25,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes' marginal tax rate is 40%, and a 11% WACC is appropriate for the project.

Calculate the project's NPV. Round your answer to the nearest cent.

Year 0 project cash flow = Initial investment in Machine +  Initial investment in Working Capital

Year 0 project cash flow = 240000 + 25000

Year 0 project cash flow = - 265000

Year 1 project cash flow = Annual reduce pretax manufacturing costs*(1-tax rate) + Depreciationin year 1 *tax rate

Year 1 project cash flow = 90000*(1-40%) + (240000*33%)*40%

Year 1 project cash flow = $ 85680

Year 2 project cash flow = Annual reduce pretax manufacturing costs*(1-tax rate) + Depreciationin year 1 *tax rate

Year 2 project cash flow = 90000*(1-40%) + (240000*45%)*40%

Year 2 project cash flow = $ 97200

Year 3 project cash flow = Annual reduce pretax manufacturing costs*(1-tax rate) + Depreciationin year 1 *tax rate

Year 3 project cash flow = 90000*(1-40%) + (240000*15%)*40%

Year 3 project cash flow = $ 68400

Year 4 project cash flow =  Annual reduce pretax manufacturing costs*(1-tax rate) + Depreciationin year 1 *tax rate

Year 4 project cash flow = 90000*(1-40%) + (240000*7%)*40%

Year 4 project cash flow = $ 60720

Year 5 project cash flow =  Annual reduce pretax manufacturing costs*(1-tax rate) + + Post tax salvage Value + Working Capital Realised

Year 5 project cash flow = 90000*(1-40%) + 24000*(1-40%) + 25000

Year 5 project cash flow = $ 93400

NPV = - 265000 + 85680/1.11 + 97200/1.11^2 + 68400/1.11^3 + 60720/1.11^4 + 93400/1.11^5

NPV = $ 36,518.88

Answer

$ 36,518.88

Calculate the project's IRR. Round your answer to two decimal places.

using Excel formula

IRR = irr(value)

IRR = irr({-265000 , 85680, 97200,68400,60720,93400})

IRR = 16.48 %

Calculate the project's MIRR. Round your answer to two decimal places.

using Excel formula

MIRR = mirr(value,finance rate, reinvest rate)

MIRR = mirr({-265000 , 85680, 97200,68400,60720,93400},11%,11%)

MIRR = 13.90 %

Calculate the project's payback. Round your answer to two decimal places.

Project's payback = 3 + (265000 - 85680 - 97200 - 68400)/60720

Project's payback = 3.23 years

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