Question

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 as three-year MACRS property for tax purposes. The required initial net working capital investment is $90,000, the marginal tax rate is 22 percent, and the project discount rate is 12 percent. The device has an estimated Year 5 salvage value of $71,000. 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.)

Answer 1

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