A proposed cost-saving device has an installed cost of $800,000. The device will
ID: 2383969 • Letter: A
Question
A proposed cost-saving device has an installed cost of $800,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is $62,000, the marginal tax rate is 30 percent, and the project discount rate is 8 percent. The device has an estimated Year 5 salvage value of $87,000. What level of pretax cost savings do we require for this project to be profitable? MACRS schedule. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
pretax cost savings
A proposed cost-saving device has an installed cost of $800,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is $62,000, the marginal tax rate is 30 percent, and the project discount rate is 8 percent. The device has an estimated Year 5 salvage value of $87,000. What level of pretax cost savings do we require for this project to be profitable? MACRS schedule. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Year
Depreciation %
Depreciation $
Depreciation Tax
1
33.33%
266,640
79,992
2
44.45%
355,600
106,680
3
14.81%
118,480
35,544
4
7.41%
59,280
17,784
Net Salvage Value =Salvage Value – (Salvage Value – Book Value)*Tax
=87,000 – (87,000-0)*30%
= 60,900
NPV= -800,000 - 62,000 + 79,992/1.08 + 106,680/(1.08)2 + 35,544/(1.08)3 + 17,784/(1.08)4 + (60,900+62,000)/(1.08)5 + 0.7PVIFA(8%,5)* Level of Pretax Cost Savings
0 =-862,000 + 290,459 + 0.7(3.9927)*Level of Pretax Cost Savings
PreTax Cost Savings Required=$204,494.99
Year
Depreciation %
Depreciation $
Depreciation Tax
1
33.33%
266,640
79,992
2
44.45%
355,600
106,680
3
14.81%
118,480
35,544
4
7.41%
59,280
17,784