A proposed cost-saving device has an installed cost of $690,000. The device will
ID: 2701992 • Letter: A
Question
A proposed cost-saving device has an installed cost of $690,000. 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 $51,000, the marginal tax rate is 34 percent, and the project discount rate is 10 percent. The device has an estimated Year 5 salvage value of $76,000. 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
OK here you go.
The cash flows (not including the cost savings) are
0 (741,000) 690,000 +51,000
1 78199 (690,000 *33.33% * .34)
2 104280 (690,000* 44.45%*.34)
3. 34,744 (690,000*14.81%*34)
4. 17,384 (690,000*7.41% * .34)
5. 127,000 (51,000+ 76,000*.66)
I ran these through my financial calculator at a discount rate of 10% and got (482,938.59)
I then looked up the factor in an annuity table for 5 years at 10%. I got 3.7908.
I divided 482,938.59 by 3.7908 and got 127,397.54.
Since this is an after tax amount I grossed it up by dividing by (1-.34= .66) and got 193,026.57.
Let me know if you have questions on this.