Holmes Manufacturing is considering a new machine .that costs $260,000 and would

Question

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 life. The applicable depreciation rates are 33%, 45%, 15%, and 7%, Net operating working capital would increase by $26,000 initially, but it would be recovered at the end of the project 5-year life. Holmes' marginal tax rate is 40% WACC is appropriate for the project. Calculate the project's NPV. Round your answer to the nearest cent. 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.

Explanation / Answer

We have been provided with the informatin that Holmes new machine that cost for $ 260,000

and would reduce pertax manufacturering cost for $90,000 annually

So first of all do project analyses with the given figure in the sum

WAcc 10%
Tax rate 40%

79000+61000*1.1^4+69000*1.1^3+99000*1.1^2+87000*1.1 = 475639

Payback Time = 4.42 year

we required 275,000 tpo get payback from investment and from above table we can se that in genrate between 4 to 5 year

Required cf 275000

at 4 th year 254413.63

diffrance 20586.37

20586.37/49052.785 = 0.42 year

4 year +0.42 year

= 4.42 year

Period 0 1 2 3 4 5 Machine Cost -25000 Pre tax Savings 90000 90000 90000 90000 90000 Tax Effect of Savings -36000 -36000 -36000 -36000 -36000 Depreciation Tax Savings 33000 45000 15000 7000 Working Capital -25000 Total Cash Flows -275000 87000 99000 69000 61000 79000 Present Value -275000 790890 81818.18 51840.72 41663.82 49052.785 MIRR Cash Flow Values (275,000) 0 0 0 0 475639.1 MIRR 11.58 %

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