Holmes Manufacturing is considering a new machine that costs $250,000 and would reduce pretax manufacturing costs...

  

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Holmes Manufacturing is considering a new machine that costs $250,000 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 $23,000 at the end of its 5 year operating life. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. Net operating working capital would increase by $25,000 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 10% WACC is appropriate for the project. a. Calculate the project's NPV, IRR, MIRR, and payback. b. Assume that 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? Holmes Manufacturing is considering a new machine that costs $250,000 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 $23,000 at the end of its 5 year operating life. The applicable depreciation rates are 33%, 45%, 15%, and 7% as discussed in Appendix 12A. Net operating working capital would increase by $25,000 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 10% WACC is appropriate for the project. a. Calculate the project's NPV, IRR, MIRR, and payback. b. Assume that 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?

Answer rating: 100% (QA)

a The Free cashflows from the project are calculated as shown below Year 0 1 2 3 4 5 Savings in Pretax manufacturing cost 90000 90000 90000 90000 9000... View the full answer