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 $22,000 at the end of its 5-year operating life. Net operating working capital would increase by $26,000 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 12% WACC is appropriate for the project.

1. 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.
   $   
   
   Calculate the project's IRR. Do not round intermediate calculations. Round your answer to two decimal places.
     %
   
   Calculate the project's MIRR. Do not round intermediate calculations. Round your answer to two decimal places.
     %
   
   Calculate the project's payback. Do not round intermediate calculations. Round your answer to two decimal places.
     years
2. 
   
3. 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: $   
   
4. 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
   Worst case	0.35	$72,000	$17,000	$31,000
   Base case	0.35	$90,000	$22,000	$26,000
   Best case	0.30	$108,000	$27,000	$21,000

   
   Calculate the project's expected NPV, its standard deviation, and its coefficient of variation. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. 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):	$
   σNPV:	$
   CV:

Answer 1

As per rules I am answering the first 4 subparts of the question

1	NPV	27688.04
2	IRR	16.25%
3	MIRR	14.48%
4	Payback	3.55

Payback = Year in which Cumulative CF is last negative -(Last negative cumulative CF/ CF of next year
Workings

Year	Working capital	Cost of new machine	Tax shield- depreciation	Sale of new machine	(Sales-cost) after tax	Net CF	Cumulative CF
0	-26000	-285000	71250			-239750	-239750
1					67500	67500	-172250
2					67500	67500	-104750
3					67500	67500	-37250
4					67500	67500	30250
5	26000			16500	67500	110000	140250