Question

A proposed cost-saving device has an installed cost of $660,000. 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 $70,000, the marginal tax rate is 23 percent, and the project discount rate is 12 percent. The device has an estimated Year 5 salvage value of $59,000. 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		-660000
Initial working capital		-70000
=Initial Investment outlay		-730000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%	0.00%
Savings			195406.92	195406.92	195406.92	195406.92	195406.92
-Depreciation	=Cost of machine*MACR%		-219978	-293370	-97746	-48906	0
=Pretax cash flows			-24571.0768	-97963.08	97660.923	146500.92	195406.92
-taxes	=(Pretax cash flows)*(1-tax)		-18919.7291	-75431.57	75198.911	112805.71	150463.33
+Depreciation			219978	293370	97746	48906	0
=after tax operating cash flow			201058.2709	217938.43	172944.91	161711.71	150463.33
reversal of working capital							70000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						45430
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							115430
Total Cash flow for the period		-730000	201058.2709	217938.43	172944.91	161711.71	265893.33
Discount factor=	(1+discount rate)^corresponding period	1	1.12	1.2544	1.404928	1.5735194	1.7623417
Discounted CF=	Cashflow/discount factor	-730000	179516.3133	173739.18	123098.77	102770.72	150875.02
NPV=	Sum of discounted CF=	0