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A proposed cost-saving device has an installed cost of $680,000. The device will be used in...

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Finance

A proposed cost-saving device has an installed cost of $680,000.The device will be used in a five-year project but is classified asthree-year MACRS property for tax purposes. The required initialnet working capital investment is $90,000, the marginal tax rate is22 percent, and the project discount rate is 12 percent. The devicehas an estimated Year 5 salvage value of $71,000. What level ofpretax cost savings do we require for this project to beprofitable? MACRS schedule. (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)

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4.0 Ratings (610 Votes)

Time line 0 1 2 3 4 5
Cost of new machine -680000
Initial working capital -90000
=Initial Investment outlay -770000
3 years MACR rate 33.33% 44.45% 14.81% 7.41% 0.00%
Savings 201713.15 201713.15 201713.15 201713.15 201713.15
-Depreciation =Cost of machine*MACR% -226644 -302260 -100708 -50388 0
=Pretax cash flows -24930.8529 -100546.9 101005.15 151325.15 201713.15
-taxes =(Pretax cash flows)*(1-tax) -19446.0653 -78426.55 78784.015 118033.61 157336.25
+Depreciation 226644 302260 100708 50388 0
=after tax operating cash flow 207197.9347 223833.45 179492.01 168421.61 157336.25
reversal of working capital 90000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 55380
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 145380
Total Cash flow for the period -770000 207197.9347 223833.45 179492.01 168421.61 302716.25
Discount factor= (1+discount rate)^corresponding period 1 1.12 1.2544 1.404928 1.5735194 1.7623417
Discounted CF= Cashflow/discount factor -770000 184998.156 178438.66 127758.87 107034.98 171769.33
NPV= Sum of discounted CF= 5.82077E-10
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