Question

A proposed cost-saving device has an installed cost of $750,000. 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 $61,000, the marginal tax rate is 23 percent, and the project discount rate is 10 percent. The device has an estimated Year 5 salvage value of $94,000. 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 cost savings

Answer 1

M N P a Goal Seek ? x B3 - X A B C Deprecia 1 Year Cost savings tion | 2 0 3 11 $278.287.92 1 249,975 4 21 $278,287.92 333,375 5 3 $278.287.92 111,075 4 $278,287.92 55,575 7 5 $278,287.92 - Set cell: M9 fix =SUM(M2:M8) D E F H I J K L Net Depreciati Operating Net working Net cash PVIF PBT Tax@23% income on cash flows capital Investment flows @10 (61,000) (750,000) $ (811,000) 1.000 28,313 6,512 21,801 | 249,975 271,776 $ 271,776 0.909 (55,087) (12,670)| (42,417) 333,375 290,958 $ 290,958 0.826 167,213 38,459 128,754 111,075 239,829 $ 239,829 0.751 222,713 51,224 171,489 55,575 227,064 $ 227,064 0.683 278,288 64,006 214,282 - 214,282 $ 61,000 $ 72,380 $ 347,662 0.621 =94000*(1-23%) Net present value Present value -$811,000.00 $247,069.04 $240,461.11 $180,187.04 $155,087.73 $215,870.56 O To value: By changing cell: $B$3 L OK | Cancel $ 227,675.49

M C3 fix =750000*0.3333 A B C D E F G H I J K L Deprecia Net Depreciati Operating Net working Net cash PVIF 1 Year Cost savings tion | PBT Tax@23% income on cash flows capital Investment flows @10 20 (61,000) (750,000) $ (811,000) 1.000 3 1 $200,287.63 249,975 (49,687) (11,428) (38,259) 249,975 211,716 $ 211,716 0.909 4 2 $200,287.63 333,375 (133,087) (30,610) (102,477) 333,375 230,898 $ 230,898 0.826 5 3 $200,287.63 111,075 89,213 20,519 68,694 111,075 179,769 $ 179,769 0.751 6 4 $200,287.63 55,575 144,713 33,284 111,429 55,575 167,004 $ 167,004 0.683 5 $200,287.63 200,288 46,066 154,221 - 154,221 $ 61,000 $ 72,380 $ 287,601 0.621 =94000*(1-23%) Net present value 333,375 179,769 moooo Present value -$811,000.00 $192,468.84 $190,824.57 $135,062.91 $114,065.79 $178,577.89 11 Hence, pretax cost savings is $200,287.63

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