Holmes Manufacturing is considering a new machine that costs $290,000 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 hava a value of $25,000 at the end of its 5-year operating life. Net operating working capital would increase by $28,000 initially, but it would be recovered at the end of the 15- life. Holmes's marginal tax Project's rate is 25%, and a 12%. WACC is appropriate for the project, ia llamps 300 bm X 210 a) Calculate the Pyret's NPV Negative value, if any, should be indicated by a minus sign. Da not Yound intermediate calculations. Rand your answer to the nearest cent. wwzno wow lonas 20orl Sear $ Calculate the project's IRR. % Calculate the project's MIRR % Calculate the project's pay back years b. Assume management is unsure about the $90,000 cost savings - this figure could deviate by as much as plus or minus sighn. Rand the nearest cent. your answers to 20% Saungs increase $. 20% Savings decrease $ Hond 2 = A/ ANALY to do a scenario C. Suppose the fo wants you analysis with different values for the cost savings, the machine's salvage value, and the net operating. to working capital (Now) requirement. She asks use the following probabilities and values in the scenario analysis. you Scenano Probability Cost Savings Salvage Value Worst case 0.35 $72,000 $20,000 Base Case 0.35 Base Case CV S Nowe $33,000 $90,000 $25,000 0.30 $108,000 $30,000 Calculate the project's expected NVPV, its standard deviation, and its coefficient of variation. Round your answer for expected NPV and for standard deviation to the nearest cent and for coefficient of variation to two decimal places. E (NPV): S NPV $ $28,000 $23,000
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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