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 marginal 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.) ok Pretax cost savings 278.287 92 t mces Next 18 of 19 <Prev

Answer 1

B3 : 3x =SUM(M2:M8) E M N O P Q X Goal Seek ? x + A B C D Deprecia 1 Year Cost savings tion PBT 0 3 11 $200,287.63 | 253,308 (53,020) 4 2 $200,287.63 | 337,820 (137,532) 3 $200,287.63 112,556 87,732 6 4 $200,287.63 56,316 143,972 5 $200,287.63 200,288 2 Set cell: M9 F G H I J K L Net Depreciati Operating Net working Net cash PVIE Tax@25% income on cash flows capital Investment flows @8% (65,000) (760,000) $ (825,000) 1.000 (13,255)| (39,765) 253,308 213,543 | $ 213,543 0.926 (34,383) (103,149) 337,820 234,671 $ 234,671 0.857 21,933 65,799 112,556 178,355 $ 178,355 0.794 35,993 107,979 56,316 164,295 $ 164,295 0.735 50,072 150,216 150,216 $ 65,000 $ 75,000 $ 290,216 (0.681 =100000*(1-25%) | Net present value Present value -$825,000.00 $197,724.75 $201,192.32 $141,583.73 $120,761.53 $197,515.95 To value: By changing cell: 5 $B$3 DOK Cancel 8 $ 33,778.27

M. M9 : x + 3x =SUM(M2:M8) A B C D E F G H I J K L Deprecia Net Depreciati Operating Net working | Net cash PVIF 1 Year cost savings tion PBT Tax@25% income on cash flows capital Investment 20 (65,000)| (760,000) $ (825,000) 1.000 3 1 $189,007.65 253,308 (64,300) (16,075) (48,225) 253,308 205,083 $ 205,083 0.926 4 2 $189,007.65 337,820 (148,812) (37,203)| (111,609) 337,820 226,211 $ 226,211 0.857 5 3 $189,007.65 112,556 76,452 19,113 57,339 112,556 169,895 $ 169,895 0.794 6 4 $189,007.65 56,316 132,692 33,173 99,519 56,316 155,835 $ 155,835 0.735 7 5 $ 189,007.65 - 189,008 47,252 141,756 - 141,756 $ 65,000 $ 75,000 $ 281,756 0.681 =100000*(1-25%) Net present value Ə0 V AWN- Present value -$825,000.00 $189,891.42 $193,939.25 $134,867.92 $114,543.19 $191,758.22 (0.00) 11 Hence, pretax cost savings is $189,007.65

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