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

depriciation of each year

D1= 700,000* 0.3333 =233310

D2 = 700000*0.4445=311150

D3 = 700000* 0.1481 =103670

D4 = 700000 *0.0741 =51870

using tax shiledapproach UCFofeach year

OCF1=(S-C)*(1-0.30) +0.30*233310

OCF2=(S-C)*(1-0.30) +0.30*311150

OCF3=(S-C)*(1-0.30) +0.30*103670

OCF4=(S-C)*(1-0.30) +0.30*51870

OCF5=(S-C)*(1-0.30)

after-tax salvage value= 77000 * (1-0.30)=53900

NPV =0 = -700000 -52000 +(S-C) *0.7*PVIFA(8%,5)+0.3(233310/1.08 + 311150/1.08^2 + 103670/1.08^3 +51870/1.08^4)+105900/1.08^5

(S-C) *0.7*PVIFA(8%,5)=465135.1291

(S-C)=166423.41

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