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.

Explanation / Answer

Year After tax Cashflow WACC PV NPV 0 -291000 12% -291000.00 -$81,702.47 1 54000 12% 48214.29 2 54000 12% 43048.47 3 54000 12% 38436.13 4 54000 12% 34317.98 5 79800 12% 45280.66

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