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Homework answers / question archive / Holmes Manufacturing is considering a new machine that costs $290,000 and would reduce pretax manufacturing costs by $90,000 annually
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 have a value of $24,000 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 project's 5-year life. Holmes's marginal tax rate is 25%, and a 13% WACC is appropriate for the project.
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
Based on the given data, pls find below steps, workings and answers:
NPV of the Project is $ 16880.07; IRR of the Project is 15.58% and MIRR of the Project is 14.51%; Payback period is 3.64 years; Since the NPV is positive, the Project is recommended;
Computation of IRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%);
Computation of MIRR: This can be computed using formula in Excel = MIRR("range of cashflows", discounting factor%, reinvestment factor%); Here, both discounting factor % and reinvestment factor% are considered same.
Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;
Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;
The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;
Computation of Normal / Discounted Pay Back Period: Here, the period is computed for each project, based on cumulative normal /discounted cash flows: If the cumulative value is less than or equal to zero, the period is considered as 12 months (it means that the net cumulative cash flow has not yet paid back the initial investment); Once the value turns positive in a particular year, the period for such year is observed at a proportion of actual discounted cash flow to the cumulative CF; This gives the period less than 12 months in such year; Once this is computed, total of all the years is taken and divided by 12, to arrive at the Payback period in no.of years.
please see the attached file for the complete solution.
