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ID: 2776539 • Letter: C
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CengageNOW | Online tei X D west.cengagenow.com/ilrn/takeAssignment/takeAssignmentMain.do eBook Problem 12-19 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 lfe. The apokable depreciation rates are D3% 45% 15% and 796 Net operating working capital would increase by $26,000 initially, but it would be reco ered at the end of the project's 5-year life. Homes' marginal tax rate is 40%, and a 10% wACC S appropriate for the project. a. Calculate the project's NPV. Round your answer to the nearest cent. Calculate the croject's IRR Round your answer to two dedimal places. Calculate the project's MIRR. Round your answer to two decimal places. Calculate the project's payback Round your answer to two decdmal places, years b. Assume management is unsure about the S90,000 cost saving-this gure could deviate by as much as Eks or minus 20% what would thNFV be under each of these tuations, Round r ur answers to the nearest cent. 20% savings increase. $ 20% savings decrease. $ C Suspose the OFO wants you to do a scenario analysis with different vakues for the cost savings, the machine's salvage value, and the eet 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 035 Base case 0.35 Best case 0.30 $72,000 0.3 $90,000 $108,000 $19,000 $31,000 24,000 $26,000 29,000$21,000 135Explanation / Answer
Answer:a MAchine cost=$260000
Cost saving=$90000 annually
Estimated useful life=5 years
NWC=$26000
Salvage value=$24000
Tax rate=40%
Gain on sale=$24000-0=$24000
tax on gain=$24000*40%=9600
Net salvage value=$24000-$9600=14400
IRR=14%
Payback Period:
=3 years+27280/61280=3.45 years
Answer:b 20% saving increase:
90000*1.20=108000
20 % Decrease:
=90000*0.80=72000
Answer:c Base case is already calculated in part a.
Worst case:
Cost saving=$72000 annually
Estimated useful life=5 years
NWC=$31000
Salvage value=$19000
Tax rate=40%
Gain on sale=$19000-0=$19000
tax on gain=$19000*40%=7600
Net salvage value=$19000-$7600=11400
Best case:
Cost saving=$108000 annually
Estimated useful life=5 years
NWC=$21000
Salvage value=$29000
Tax rate=40%
Gain on sale=$29000-0=$29000
tax on gain=$29000*40%=11600
Net salvage value=$29000-$11600=17400
Answer: E(NPV):
Standard deviation=Square root of 500837866.7
=22379.40
C.V=22379.40/28115.62=0.7959
Year Rate Annual Depreciation 1 33% 85800 2 45% 117000 3 15% 39000 4 7% 18200Related Questions
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