Question

A proposed cost-saving device has an installed cost of $675,000. 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 $85,000, the marginal tax rate is 21 percent, and the project discount rate is 11 percent. The device has an estimated Year 5 salvage value of $68,000. 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

	0	1	2	3	4	5
MACRS %		33.33%	44.45%	14.81%	7.41%
Investment	-675,000
NWC	-85,000					85,000
Salvage						68,000
Savings		192,380.76	192,380.76	192,380.76	192,380.76	192,380.76
Depreciation		-224,977.50	-300,037.50	-99,967.50	-50,017.50
EBT		-32,596.74	-107,656.74	92,413.26	142,363.26	192,380.76
Tax (21%)		6,845.32	22,607.92	-19,406.78	-29,896.28	-40,399.96
Profits		-25,751.42	-85,048.82	73,006.48	112,466.98	151,980.80
Cash Flows	-760,000	199,226.08	214,988.68	172,973.98	162,484.48	290,700.80
NPV	($0.00)

Create an NPV table as shown above with savings equal to zero to begin with.

Depreciation = Investment x MACRS %

Cash Flows = Investment + NWC + Salvage x (1 - tax) + Profits + Depreciation

Using trial and error method, change the value of savings such that the NPV = 0

The project is profitable when pretax savings > $192,380.76