A proposed cost-saving device has an installed cost of $835,000. 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 $95,000, the marginal tax rate is 25 percent, and the project discount rate is 11 percent. The device has an estimated Year 5 salvage value of $145,000. 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 answer to 2 decimal places, e. g., 32.16.)

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Business

Rose Mckenzie

16 November, 11:17

A proposed cost-saving device has an installed cost of $835,000. 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 $95,000, the marginal tax rate is 25 percent, and the project discount rate is 11 percent. The device has an estimated Year 5 salvage value of $145,000. 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 answer to 2 decimal places, e. g., 32.16.)

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Victor Randolph · Answer 1

The level of pretax cost savings we require for this project to be profitable is $203272.65

Explanation:

investment in fixed assets + investment in NWC = pretax cost savings * (1-t) * PVIFA (R%, n) + PV of dep tax shield + PV of salvage + PC of NWC

let a be the pretax cosy savings, then:

835000 + 95000 = a * (1-0.25) * 3.69589702 + 170786.28 + 64537.83 + 56377.88

930000 = 2.771922765*a + 291701.99

2.771922765*a = 638298.01

a = $230272.65

Therefore, The level of pretax cost savings we require for this project to be profitable is $203272.65.