Holmes Manufacturing is considering a new machine that costs $285,000 and would reduce pretax manufacturing costs by $90,000 annually. The new machinewill 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. Netoperating working capital would increase by $25,000 initially, but it would be recovered at the end of the project's 5-year life. Holmes's marginal tax rate is25%, and a 10% WACC is appropriate for the project.a. Calculate the project's NPV. Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to thenearest cent.$ 43362.03Calculate the project's IRR. Do not round intermediate calculations. Round your answer to two decimal places.16.4Calculate 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 caseb. 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 undereach of these situations? Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to thenearest cent.20% savings increase: $20% savings decrease: $Base caseyearsc. 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 workingcapital (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 $25,0000.35340869.240.35-7813.58$72,000$90,000

Since you require help to solve the problem with 20% savings increase, the solution for that will be…

Answered: 20% savings increase: $ * 340869.24

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20% savings increase: $ * 340869.24

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 10P: Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6...

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Question

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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