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A proposed cost-saving device has an installed cost of $654,000. The device will be used in...

A proposed cost-saving device has an installed cost of $654,000. The device will be used in a five-year project but is classified as three-year MACRS (MACRS Table) property for tax purposes. The required initial net working capital investment is $48,500, the marginal tax rate is 30 percent, and the project discount rate is 15 percent. The device has an estimated Year 5 salvage value of $73,500.

  

What level of pretax cost savings do we require for this project to be profitable? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.,32.16.)

  

Pretax savings _____$

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Answer #1
Formulate problem for net present value and use a randon value for cost savings as shown below.

Net Incremental PVIF Operating working Depreciation cash flows| capital Net free cash @15 1 Yearl Cost savings! Depreciation! PBT Tax@30% income | Investment flows Present value S-48,500 -654,000$ 702,5001.000 $ $ 247,393 0.870 S $ 247,393 0.756 S s 247.393 0.658 S $ 247,393 0.572 S $ 42,022 $ 12,607 $ 29,415$ 217,978 $ 247,393 $ 48,500$51,450 347,343 0.497 $ (702,500.00) 215,124.75 187,065.00 162,665.22 141,448.01 172,691.09 0 3 1$260,000.00$217,978 $ 42,022 $ 12,607 42 $260,000.00$290,703 $ 42,022 $ 12,607 53$260,000.00$96,857$ 42,022 $ 12,607 6 4 $260,000.00 $48,461 42,022 12,607 7 5$260,000.00 $ 29,415$ 217,978$ 247,393 $ 29,415$ 217,978$ 247,393 $ 29,415$ 217,978$ 247,393 $ 29,415 $ 217,978$ 247,393 $ -73500*( 1-30% Net present value $ 176,494.06

Formulate solver solution like shown below and click solve

Solver Parameters Set Objective SMS9 To: OMax Yalue O By Changing aiable Cells: SBS3:SBS7 Subject to the Constraints: SBS3 SBS4 Add Change Delete SBS6 SBS7 Reset All Load/Save Make Unconstrained Variables Non-Negative Select a Solng GRGNonlinear Method: Options Solving Method Select the GRG Nonlinear engine for Solver Problems that are smooth nonlinear. Select the LP Simplex engine for linear Solver Problems, and select the Evolutionary engine for Solver problems that are non-smooth. Help Solve Close

Net Incremental PVIF Net Operating working |Depreciation | cash flows | capital free cash @15 Year | Cost savings |Depreciation | Tax@30% income |Investment | flows -702,500 1.000 1 PBT Present value $ $ 194,743 0.870 $ $ 194,743 0.756$ $ 194,743 0.658 S $ 194,743 0.572 S S-33,194 $ -9,958 S-23,236 $ 217,978 $ 194,743 $ 48,500 S51,450 S 294,693 0.497 $ $-48,500 -654,000$ 3 1$184,784.39 217,978 S -33,194 $ -9,958 $ -23,236$ 217,978 $194,743 $ 42 $184,784.39 $ 290,703 S-33,194 $ -9,958 $ -23,236$ 217,978 $194,743 $ 5 3$184,784.39$ 96,857 S-33,194 $ -9,958 $ -23,236$ 217,978 $194,743 $ 6 4 $184,784.39 $ 48,461 S -33,194 $ -9,958 $ -23,236$ 217,978 $194,743 $ 7 5 $184,784.39 $ 702,500.00 169,341.34 147,253.34 128,046.38 111,344.68 146,514.27 -73500( 1-30% Net present value 0.00 10 11 Hence, pretax cost savings is $184,784.39

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