Question $5(20$ marks$)$

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 $$23,000$ at the end of its $5-$year operating life. The applicable depreciation rates are $33\%,45\%,15\%,$ and $7\%.$ Net operating working capital would increase by $$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.

Required:

a$)$ Calculate the project's NPV $(8$ marks$)$

b$)$ 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:

$\backslash$table$[[$Scenario$,$Probability,Cost Savings,Salvage Value,NOWC$],[$Worst case,$0\mathrm{.}35,$$$72,000,$$$18,000,$$$30,000$