A proposed cost-saving device has an installed cost of $640,000. The device will

Question

A proposed cost-saving device has an installed cost of $640,000. 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 $55,000, the marginal tax rate is 35 percent, and the project discount rate is 12 percent. The device has an estimated Year 5 salvage value of $60,000. 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 final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Hi,

Please find the answer as follows;

Depreciation Expense

Annual Cash Flows

where S represents sales and C represents cost

After Tax Salvage Value = 60000*(1-.35) = 39000

NPV =0= - 640000 - 55000 + (S-C)*.65*PVIFA(12%,5) + .35*(213312/(1+.12)^1+ 284480/(1+.12)^2 + 94784/(1+.12)^3 + 47424/(1+.12)^4) + (55000 + 39000)/(1+.12)^5

0 = - 695000 + S-C*.65*PVIFA + 233534.59

S-C*.65*PVIFA = 695000-233534.59 = 461465.41

S-C = 461465.71/(.65*3.6048) = 196944.98

Answer is 196944.98

Thanks.

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