A proposed cost-saving device has an installed cost of $830,000. The device will
ID: 2633180 • Letter: A
Question
A proposed cost-saving device has an installed cost of $830,000. 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 $65,000, 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 $90,000. What level of pretax cost savings do we require for this project to be profitable? Refer to Table 10.7.
A proposed cost-saving device has an installed cost of $830,000. 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 $65,000, 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 $90,000. What level of pretax cost savings do we require for this project to be profitable? Refer to Table 10.7.Explanation / Answer
level of pretax cost savings do we require for this project to be profitable = $ 212,285
0 1 2 3 4 5 Initial cost -830000 Pretax costs savings 212,284.91 212,284.91 212,284.91 212,284.91 212,284.91 Depreciation 33.33% 44.45% 14.81% 7.41% 0.00% Depreciation (276,639) (368,935) (122,923) (61,503) - Net income -45047.863 -109655.063 62553.337 105547.337 148599.437 Market value 90000 Book value 0 Cash flow from sale of asset 63000 Change in working capital 65000 Recovery of working capital 65000 Net cash flow -895000 231591.137 259279.937 185476.337 167050.337 276,599 NPV 0.00