Question

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 $25,000 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 $22,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes's marginal tax rate is 40%, and a 13% WACC is appropriate for the project.

1. 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.
   years
2. 
   

3. 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. Negative amount should be indicated by a minus sign.

   20% savings increase. $

   20% savings decrease. $

4. 
   
5. 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:

   Scenario	Probability	Cost Savings	Salvage Value	NOWC
   Worst case	0.35	$72,000	$20,000	$27,000
   Base case	0.35	90,000	25,000	22,000
   Best case	0.30	108,000	30,000	17,000

   Calculate the project's expected NPV, its standard deviation, and its coefficient of variation. Round your answers to two decimal places.

   E(NPV) = $

   σ_NPV = $

   CV =

   Would you recommend that the project be accepted?

Answer 1

1.
=-240000+((90000-240000*33%)*(1-40%)+240000*33%)/1.13+((90000-240000*45%)*(1-40%)+240000*45%)/1.13^2+((90000-240000*15%)*(1-40%)+240000*15%)/1.13^3+((90000-240000*7%)*(1-40%)+240000*7%)/1.13^4+((90000-240000*0%)*(1-40%)+240000*0%)/1.13^5-22000+22000/1.13^5

=15839.96585

2.
=-240000+((90000-240000*33%)*(1-40%)+240000*33%)/(1+IRR)+((90000-240000*45%)*(1-40%)+240000*45%)/(1+IRR)^2+((90000-240000*15%)*(1-40%)+240000*15%)/(1+IRR)^3+((90000-240000*7%)*(1-40%)+240000*7%)/(1+IRR)^4+((90000-240000*0%)*(1-40%)+240000*0%)/(1+IRR)^5-22000+22000/(1+IRR)^5

=>IRR=15.59%

3.
MIRR=14.33%

4.
=3+(240000+22000-85680-97200-68400)/60720=3.17654809 years

P.S.: I am not allowed to answer more than 4 questions