Holmes Manufactuiring 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 depreciateion rates are 33%, 45% 15%, and 7% as discussed in Appendix 12A. Net operating working cpital would increase by $25,000 initially, but it would be recovered at the endo f the project's 5-year life. Holme's marginal tax rate is 40%, and a 10% WACC is appropriate for the project.
a. Calcuate the projects NPV, IRR, MIRR and payback.
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?
c. Suppose the CFO wants yo uto do a scenario analysis with diffeent values for the cost savings, the machine's salvage value, and the net operatin gworking capital (NOWC_ requriement. She asks you to use the following probabilities and values in the scenairo analysis: