Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:Holmes Manufacturing is considering a new machine that costs $285,000 and would reduce pretax manufacturing costs by $90,000 annually. The new machine
will be fully depreciated at the time of purchase. Management thinks the machine would have a value of $23,000 at the end of its 5-year operating life. 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
25%, and a 10% 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.
$ 43362.03
Calculate the project's IRR. Do not round intermediate calculations. Round your answer to two decimal places.
16.4
Calculate the project's MIRR. Do not round intermediate calculations. Round your answer to two decimal places.
13.73
%
Calculate the project's payback. Do not round intermediate calculations. Round your answer to two decimal places.
3.54
%
Worst case
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: $
Base case
years
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
$18,000
$30,000
$23,000 $25,000
0.35
340869.24
0.35
-7813.58
$72,000
$90,000
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