Question

A proposed cost-saving device has an installed cost of $820,000. 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 $89,000, the marginal tax rate is 22 percent, and the project discount rate is 8 percent. The device has an estimated Year 5 salvage value of $136,000. 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.)

how to solve  pre tax cost savings?

Answer 1

W. Note 1 : Depreciation Schedule
Year	Opening Balance	Depreciation Rate	Depreciation	Closing Balance	Tax on Depreciation @ 22%	PVF @ 8%	Depreciation Tax Shield
1	820000	20.00%	164000	656000	36080	0.926	33410.08
2	820000	32.00%	262400	393600	57728	0.857	49472.9
3	820000	19.20%	157440	236160	34636.8	0.794	27501.62
4	820000	11.52%	94464	141696	20782.08	0.735	15274.83
5	820000	11.52%	94464	47232	20782.08	0.681	14152.6

Hence the pre tax cost savings should be $ 192924.54 or more for making the project profitable.