Question

A proposed cost-saving device has an installed cost of $760,000. 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 $65,000, the tax rate is 25 percent, and the project discount rate is 8 percent. The device has an estimated Year 5 salvage value of $100,000. 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.) Pretax cost savings

Answer 1

fix =SUM(M2:M8) ВЗ A В E F G Н K L М P о Depreciati Operating Net working Deprecia Net Net cash PVIF X Goal Seek Year Cost savings 1 Таx@25% cash flows capital flows @8% Present value tion РВТ income Investment on (760,000) (825,000) 1.000 273,174 0.926 357,686 0.857 132,422 0.794 76,182 0.735 159,866 0.681 -$825,000.00 $252,938.82 $306,658.03 $105,120.79 $55,995.99 $108,802.06 2 (65,000) 0 Set cell: M9 1 $279,795.90 253,308 2 $279,795.90 337,820 3 $279,795.90 112,556 4 $279,795.90 5 $279,795.90 $ 3 19,866 26,488 6,622 253,308 273,174 To value: 26,488 $ 4 357,686 6,622 19,866 337,820 $B$3 By changing cell: 5 $ 26,488 6,622 19,866 112,556 132,422 56,316 $ 6 26,488 76,182 6,622 19,866 56,316 Cancel ок 75,000 - 100000* (1-25%) 19,866 $ 65,000 $ $ 7 19,866 26,488 6,622 8 $ 4,515.68 Net present value O

Depreciati Operating Net working сapital (65,000) Deprecia PVIF Net Net cash Year Cost savings Таx@25% cash flows flows @8% Present value tion РВT income Investment on (760,000) $(825,000) 1.000 -$825,000.00 $251,891.61 $305,688.39 $104,222.98 $55,164.68 $108,032.33 0 1 $278,287.92 253,308 2 $278,287.92 337,820 3$278,287.92 112,556 4 $278,287.92 5 $278,287.92 272,043 0.926 $ 18,735 18,735 272,043 24,980 6,245 253,308 356,555 0.857 $ 24,980 337,820 6,245 356,555 131,291 0.794 75,051 0.735 158,735 0.681 24,980 6,245 18,735 112,556 131,291 $ 24,980 6,245 56,316 18,735 56,316 75,051 18,735 $ 75,000 - 100000* (1-25%) $ $ 24,980 6,245 18,735 65,000 Net present value Hence, pretax cost savings is $278,287.92

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