A proposed cost-saving device has an installed cost of $664,000. The device will
ID: 2711800 • Letter: A
Question
A proposed cost-saving device has an installed cost of $664,000. The device will be used in a five-year project but is classified as three-year MACRS (MACRS Table) property for tax purposes. The required initial net working capital investment is $53,500, the marginal tax rate is 34 percent, and the project discount rate is 13 percent. The device has an estimated Year 5 salvage value of $78,500.
What level of pretax cost savings do we require for this project to be profitable?
A proposed cost-saving device has an installed cost of $664,000. The device will be used in a five-year project but is classified as three-year MACRS (MACRS Table) property for tax purposes. The required initial net working capital investment is $53,500, the marginal tax rate is 34 percent, and the project discount rate is 13 percent. The device has an estimated Year 5 salvage value of $78,500.
Explanation / Answer
The pretax cost of savings must be greater than 3,00,000 for the project to be profitable
Discount 13% Year 0 1 2 3 4 5 Initial cost -664000 Initial networking capital -53500 Pretax cost saving 3,00,000.00 3,00,000.00 3,00,000.00 3,00,000.00 3,00,000.00 78500 Salvage value Net CF -717500 300000 300000 300000 300000 378500 POST TAX@34% -717500 198000 198000 198000 198000 249810 DCF -717500 175221.239 155063.0433 137223.9321 121437.1081 135586.8596 NPV 7,032.18