Holmes Manufacturing is considering a new machine that costs $270,000 and would

Question

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.

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 =   

Scenario Probability Cost Savings Salvage Value NOWC Worst case 0.35 $72,000 $17,000 $26,000 Base case 0.35 $90,000 $22,000 $21,000 Best case 0.30 $108,000 $27,000 $16,000

Explanation / Answer

The IRR is 13.2%.

Year 0 1 2 3 4 5 Initial cost -270,000 working capital -21000 reduction in manufacturing cost        90,000      90,000     90,000     90,000      90,000 Less: depreciation -89100 -121500 -40500 -18900 0 salvage value - profit on sale      22,000 net profit              900    (31,500)     49,500     71,100    112,000 Tax -40%              360    (12,600)     19,800     28,440      44,800 net profit after tax              540    (18,900)     29,700     42,660      67,200 ADD: depreciation 89100 121500 40500 18900 0 Cash flow        89,640    102,600     70,200     61,560      67,200 working capital recovery 21000 total inflow        89,640    102,600     70,200     61,560      88,200 Discount factor - 12% 1 0.8929 0.7972 0.7118 0.6355 0.5674 Total cashflow -291,000 80035.71 81792.09 49966.97 39122.49 50047.05 NPV 9,964 Cummulative cashflow -291,000 (201,360)    (98,760) (28,560)     33,000    121,200 Payback period = 3+(28560/39122.49) 3.73 years

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