In: Finance
Holmes Manufacturing is considering a new machine that costs $270,000 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 $20,000 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 10% WACC is appropriate for the project.
Scenario | Probability | Cost Savings | Salvage Value | NOWC |
Worst case | 0.35 | $72,000 | $15,000 | $31,000 |
Base case | 0.35 | $90,000 | $20,000 | $26,000 |
Best case | 0.30 | $108,000 | $25,000 | $21,000 |
E(NPV): | $ |
σNPV: | $ |
CV: |