A proposed power-saving equipment has a purchase price of $520,000 and installat

Question

A proposed power-saving equipment has a purchase price of $520,000 and installation cost of $60,000. The equipment will be used in a four-year project but is classified as five-year MACRS property for tax purposes. The equipment is expected to save $280,000 before taxes per year in energy costs, and it will have a salvage value of $60,000 at the end of the project. To decide on the feasibility of the investment, the managers have ordered a series of tests to determine whether the proposed equipment will realize the required costs savings or not for a total cost of $18,000. The required rate of return on the equipment is 14% and it is expected to increase working capital by $45,000 at the beginning of the project. The tax rate is 35 percent and the MACRS depreciation schedule is as follows:

Year

1

2

3

4

5

6

MACRS

20.00%

32.00%

19.20%

11.52%

11.52%

5.76%

The total initial investment is (total cash flows in Year 0).

Year

1

2

3

4

5

6

MACRS

20.00%

32.00%

19.20%

11.52%

11.52%

5.76%

Explanation / Answer

2) -$535,000

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