A proposed cost-saving device has an installed cost of $648,000. The device will

Question

A proposed cost-saving device has an installed cost of $648,000. 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 $45,500, 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 $70,500.

What level of pretax cost savings do we require for this project to be profitable? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

What level of pretax cost savings do we require for this project to be profitable? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

For the NPV should be at least 0

The NPV calcualtion at the bare minimum cost savig

Note: The after tax salvage value is calculated as 70,500*(1-0.34) = 46,530. The depreciation is done using 3 year MACRS depreciatble table percentages.

Hence by trail and error method, the annual preatx cost savings should be at least $202,140.40 for the project to be profitable

Year 0 1 2 3 4 5 Installed Cost -648000 Initial WC -45500 Cost Savings 202140.40 202140.40 202140.40 202140.40 202140.40 Depreciation 215978.4 288036 95968.8 48016.8 0 Prfoit Before tax -13838 -85895.6 106171.6 154123.6 202140.4 Tax at 34% -4704.92 -29204.504 36098.344 52402.024 68727.736 Profit after tax -9133.08 -56691.096 70073.256 101721.576 133412.664 Add back depreciation 215978.4 288036 95968.8 48016.8 0 Return of Working Capital 45500 Add back final after tax salavge Value 46530 Total Cash flow -693500 206845.3 231344.904 166042.056 149738.376 225442.664 NPV $                   0.02

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