Question

A proposed cost-saving device has an installed cost of $665,000. 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 $75,000, the marginal tax rate is 24 percent, and the project discount rate is 13 percent. The device has an estimated Year 5 salvage value of $62,000. 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 answer to 2 decimal places, e.g., 32.16.) pretax saving cost =

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-665000
Initial working capital		-75000
=Initial Investment outlay		-740000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%	0.00%	0.00%
Savings			204800.106	204800.106	204800.106	204800.11	204800.11
-Depreciation	=Cost of machine*MACR%		-221644.5	-295592.5	-98486.5	-49276.5	0	0	=Salvage Value
=Pretax cash flows			-16844.394	-90792.394	106313.606	155523.61	204800.11
-taxes	=(Pretax cash flows)*(1-tax)		-12801.7394	-69002.2194	80798.34059	118197.94	155648.08
+Depreciation			221644.5	295592.5	98486.5	49276.5	0
=after tax operating cash flow			208842.76	226590.28	179284.84	167474.44	155648.08
reversal of working capital							75000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						47120
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							122120
Total Cash flow for the period		-740000	208842.76	226590.28	179284.84	167474.44	277768.08
Discount factor=	(1+discount rate)^corresponding period	1	1.13	1.2769	1.442897	1.6304736	1.8424352
Discounted CF=	Cashflow/discount factor	-740000	184816.6018	177453.4263	124253.3875	102715.21	150761.39
NPV=	Sum of discounted CF=	0.01