New project analysis Holmes Manufacturing is considering a new machine that cost
ID: 2649580 • Letter: N
Question
New project analysis
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 $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 $25,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes' marginal tax rate is 40%, and a 11% WACC is appropriate for the project.
Calculate the project's NPV. Round your answer to the nearest cent.
$ {C}
Calculate the project's IRR. Round your answer to two decimal places.
%
Calculate the project's MIRR. Round your answer to two decimal places.
{C}%
Calculate the project's payback. Round your answer to two decimal places.
years
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.
20% savings increase. $
20% savings decrease. $
New project analysis
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 $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 $25,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes' marginal tax rate is 40%, and a 11% WACC is appropriate for the project.
Calculate the project's NPV. Round your answer to the nearest cent.
$ {C}
Calculate the project's IRR. Round your answer to two decimal places.
%
Calculate the project's MIRR. Round your answer to two decimal places.
{C}%
Calculate the project's payback. Round your answer to two decimal places.
years
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.
20% savings increase. $
20% savings decrease. $
Calculate the project's expected NPV, its standard deviation, and its coefficient of variation. Round your answers to two decimal places.
E(NPV) = $
?NPV = $
CV =
Would you recommend that the project be accepted?
-Select-yesnoItem 10
Explanation / Answer
Year Inflow/Outflow Depn.rates(MACRS) % Depreciation Tax savings on dep. Tax on annual savings in mfg.costs NetannualCashflow PV F @ 11% PV 1 2 3 4% 5 6 7 8=3+6-7 9 10=8*9 0 Initial cost -240000 -240000 1 -240000 0 Inc. in W/C -25000 -25000 1 -25000 1 Pre-taxAnnual Savings 90000 33 79200 31680 36000 85680 0.9009 77189 2 90000 45 108000 43200 36000 97200 0.81162 78889 3 90000 15 36000 14400 36000 68400 0.73119 50013 4 90000 7 16800 6720 36000 60720 0.65873 39998 5 90000 36000 54000 0.59345 32046 5 Salvage value 24000 9600 14400 0.59345 8546 5 Recocery of NetWC 25000 25000 0.59345 14836 NPV 36518 To calculate IRR (AS PER EXCEL ) IRR = Rate at which NPV is 0, ie -265000 + 85680/( 1 + r ) + 97200 + (1 + r)^2 + 68400 / (1 + R)^3 + 60720 + (1 + R) ^4 + 93400 / (1+R)^5 = 0 Solving for r, we get IRR = 16% 0 -265000 1 85680 2 97200 3 68400 4 60720 5 93400 IRR(as per Excel) 16% MIRR CALCULATION Future values of positive cash flows@ 11 YEAR Amount Discount factor FV Year 5 139000 1 139000 Year 4 90000 1.11 99900 Year 3 90000 1.23 110889 Year 2 90000 1.37 123087 Year 1 90000 1.52 136626 Total 609502 MIRR= (n th root of Future valve of positive cash inflows@ COC /Pv of outflows) -1 where n = No.of years of investment Initial outlay = 265000 MIRR ={5 th root of of 609502/265000} - 1 Solving in Excel ,we get=0.1826 18.26% Payback period Year Cash flow Dicounted Cumulative 0 -265000 -265000 -265000 1 85680 77189 -187811 2 97200 78889 -108922 3 68400 50013 -58909 4 60720 39998 -18911 5 93400 55428 36517 Discounted paybackperiod ie.4+( abs.value of -18911)/55428= ie. 4+ 0.34= 4.34 years. 20% savings increase Year Inflow/Outflow Depn.rates(MACRS) % Depreciation Tax savings on dep. Tax on annual savings in mfg.costs NetannualCashflow PV F @ 11% PV 1 2 3 4% 5 6 7 8=3+6-7 9 10=8*9 0 Initial cost -240000 -240000 1 -240000 0 Inc. in W/C -25000 -25000 1 -25000 1 Pre-taxAnnual Savings 108000 33 79200 31680 43200 96480 0.9009 86919 2 108000 45 108000 43200 43200 108000 0.81162 87655 3 108000 15 36000 14400 43200 79200 0.73119 57910 4 108000 7 16800 6720 43200 71520 0.65873 47112 5 108000 43200 64800 0.59345 38456 5 Salvage value 24000 9600 14400 0.59345 8546 5 Recocery of NetWC 25000 25000 0.59345 14836 NPV 76434 20% savings decrease Year Inflow/Outflow Depn.rates(MACRS) % Depreciation Tax savings on dep. Tax on annual savings in mfg.costs NetannualCashflow PV F @ 11% PV 1 2 3 4% 5 6 7 8=3+6-7 9 10=8*9 0 Initial cost -240000 -240000 1 -240000 0 Inc. in W/C -25000 -25000 1 -25000 1 Pre-taxAnnual Savings 72000 33 79200 31680 43200 60480 0.9009 54486 2 72000 45 108000 43200 43200 72000 0.81162 58437 3 72000 15 36000 14400 43200 43200 0.73119 31587 4 72000 7 16800 6720 43200 35520 0.65873 23398 5 72000 43200 28800 0.59345 17091 5 Salvage value 24000 9600 14400 0.59345 8546 5 Recocery of NetWC 25000 25000 0.59345 14836 NPV -56618
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