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 $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's marginal tax rate is 40%, and a 11% WACC is appropriate for the project a. Calculate the project's NPV. Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest cent $ Calculate the project's IRR. Do not round intermediate calculations. Round your answer to two decimal places Calculate the project's MIRR. Do not round intermediate calculations. Round your answer too two decimal places. Calculate the project's payback. Do not round intermediate calculations. Round your answer to two decimal places years b. 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? Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest cent 20% savings increase: 20% savings decrease: c. 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 $72,000 $19,000 $30,000 0.35 $90,000 $25,000 Base case 0.35 $24,000 $20,000 Best case 0.30 $108,000 $29,000 Calculate the project's expected NPV, its standard deviation, and its coefficient of variation. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer for expected NPV and to the nearest cent and for standard deviation to the nearest cent and for coefficient of variation to two decimal places E(NPV): $ ONPV: $ CV: Would you recommend that the project be accepted? -Select

Answer 1

C3 - B fax D =240000*0.33 E F A C G H I J K M Net 1 Year 2 0 3| 1 2 3 Cost Depreciati Net Deprecia Operating working After-tax savings on PBT Tax@40% income tion cash flows capital Investment cash flow PVIF@11% $-25,000 (240,000) $ (265,000) 1.000 $ 90,000 $ 79,200 | 10,800 4,320 6,480 79,200 85,680 $ - I $ 85,680 0.901 $ 90,000 $108,000 (18,000) (7,200)| (10,800)| 108,000 97,200 $ . $ 97,200 0.812 $ 90,000 $ 36,000 54,000 21,600 32,400 36,000 68,400 $ - $ 68,400 0.731 $ 73,200 29,280 43,920 16,800 60,720 $ - $ 60,720 0.659 $ 90,000 $ - 90,000 36,000 54,000 - 54,000 $ 25,000 $ 14,400 $ 93,400 0.593 $ =24000*(1-40%) IRR 16.48% =IRR(K2:K7) IN Simple cumulative Present value cash flows (265,000.00) $ (265,000) 77,189.19 $ (179,320) 78,889.70 $ (82,120) 50,013.49 $ (13,720) 39,998.14 $ 47,000 55,428.35 $ 140,400 5 7 5 MIRR 13.90% EMIRR(K2:K7,11%,11%) Net present value 518.88 Payback period 3.23 years =3+13720/607201

B23 : - B X C fix D =+B3*(1+20%) E F A M N Cost savings Depreciati on | Net Tax@40% income PBT 21 Year 22 0 23 1 24 2 25 3 26 4 27 5 108,000 $ 79,200 108,000 $108,000 108,000 $ 36,000 108,000 $ 16,800 108,000 $ - 28,800 - 72,000 91,200 108,000 11,520 - 28,800 36,480 43,200 17,280 - 43,200 54,720 64,800 G H I J K L Net Deprecia Operating working After-tax tion cash flows capital Investment cash flow PVIF@11% $-25,000 (240,000) $ (265,000) 1.000 $ 79,200 96,480 $ - $ 96,480 0.901 $ 108,000 108,000 $ - $ 108,000 0.812 $ 36,000 79,200 $ - $ 79,200 0.731 $ 16,800 71,520 $ - $ 71,520 0.659 $ - 64,800 $ 25,000 $ 14,400 $ 104,200 0.593 $ = 24000*(1-40%) Present value (265,000.00) 86,918.92 87,655.22 57,910.36 47,112.44 61,837.63 Net present value 434.57 Cost Depreciati 32 Year savings on 33 0 34 1 72,000 $ 79,200 35 2 72,000 $108,000 36 3 72,000 $ 36,000 37 4 72,000 $ 16,800 38 5 72,000 $ - Net Net Deprecia Operating working After-tax PBT Tax@40% income tion cash flows capital Investment cash flow $-25,000 (240,000) $ (265,000) (7,200) (2,880) (4,320) 79,200 74,880 $ - . $ 74,880 (36,000)| (14,400)| (21,600)| 108,000 86,400 $ - | $ 86,400 36,000 14,400 21,600 36,000 57,600 $ - $ 57,600 55,200 22,080 33,120 16,800 49,920 $ . $ 49,920 72,000 28,800 43,200 - 43,200 $ 25,000 $ 14,400 $ 82,600 =24000*(1-40%) PVIF@11% 1.000 $ 0.901 $ 0.812 $ 0.731 $ 0.659 $ 0.593 $ Present value (265,000.00) 67,459.46 70,124.18 42,116.62 32,883.85 49,019.08 39 40 Net present value $ (3,396.81)

$ $ NPV 76,435 36,519 Probability Expecte NPV [(P(r)] [rxP(r)=u] NPV-u (NPV-u)^2 P(NPV)x(NPV-u)^2 0 .35 $ 26,752 $ 13,970.49 $ 195,174,611.15 $ 68,311,113.90 0.35 $ 12,782 $ (25,945.20) $ 673,153,250.68 $ 235,603,637.74 0.30 $ 22,930 $ 13,970.49 $ 195,174,611.15 $ 58,552,383.34 Coefficient of variation = Standard deviation:Mean Coefficient of variation 0.30 $ 76,435 Expected NPV u = $ 62,464 $ 362,467,134.98 Variance (012) Standard deviation (o) $ 19,038.57

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