A proposed cost-saving device has an installed cost of $700,000. The device will

Question

A proposed cost-saving device has an installed cost of $700,000. 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 $52,000, 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 $77,000. What level of pretax cost savings do we require for this project to be profitable? Refer to Table 10.7. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Pretax Cost Savings?

Explanation / Answer

D1 = $730,000(0.3333) = $243,309 D2 = $730,000(0.4444) = $324,412 D3 = $730,000(0.1482) = $108,186 OCF2 = (S - C)(1 - .35) + .35($324,412) OCF3 = (S - C)(1 - .35) + .35($108,186) OCF4 = (S - C)(1 - .35) + .35($540,930) 0 = -$730,000 - $55,000 + (S - C)(1 - .35)(PVIFA12%,5) + .35[($243,309)/1.12 + $324,412/1.122 + $108,186/1.123 + $540,930/1.124] + ($52,750 + $55,000)/1.125

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---