Holmes Manufacturing is considering a new machine that costs $250,000 and would reduce pretax manufacturing costs by $90,000 annually. Holmes would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $23,000 at the end of its 5-year operating life. The applicable 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.
Holmes Manufacturing is considering a new machine that costs $250,000 and would reduce pretax manufacturing costs by $90,000 annually. Holmes would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $23,000 at the end of its 5-year operating life. The applicable 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.
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 4P
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Holmes Manufacturing is considering a new machine that costs
$250,000 and would reduce pretax
use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $23,000 at the end of its 5-year operating life. The applicable
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,
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