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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%. 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' marginal tax rate is 40%, and a 10% WACC is appropriate for the project.Calcualte the project's NPV

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saqib097

Answer:

NPV=$37,035.13

Explanation:

Using an excel spreadsheet we can find out the cash flows from Year 01 to Year 05.

(CF0=-$275,000, CF1=87,000, CF2=$99,000, CF3=$69,000, CF4=$61,000, CF5=$92,800.

NPV = Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

NPV= -CF0 + [tex]\frac{C1}{1+r}[/tex] +...[tex]\frac{Ct}{(1+r)^{t} }[/tex]

r = WACC = 10%

= -275,000 + [tex]\frac{87,000}{1.10}[/tex] + [tex]\frac{99,000}{(1.10)^{2} }[/tex] + [tex]\frac{69,000}{(1.10)^{3} }[/tex] + [tex]\frac{61,000}{(1.10)^{4} }[/tex] +[tex]\frac{92,800}{(1.10)^{5} }[/tex]

NPV=$37,035.13

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