Probability Cost Savings Salvage Value Scenario NOWC Worst case 0.35 $ 72,000 $18,000 23,000 $30,000 Base case 0.35 90,000 108,000 25,000 20,000 Best case 0.30 28,000
Holmes Manufacturing is considering a new machine that costs
$250,000 and would reduce pretax
use the 3-year MACRS method to
depreciation rates are 33%, 45%, 15%, and 7%, as discussed in Appendix 12A. 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 10% WACC is appropriate
for the project.
a. Calculate the project’s 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 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:
Calculate the project’s expected NPV, its standard deviation, and its coefficient of
variation. Would you recommend that the project be accepted? Why or why not?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 12 images
