A proposed cost-saving device has an installed cost of $680,000.
The device will be used in...
Free
60.2K
Verified Solution
Link Copied!
Question
Finance
A proposed cost-saving device has an installed cost of $680,000.The device will be used in a five-year project but is classified asthree-year MACRS property for tax purposes. The required initialnet working capital investment is $90,000, the marginal tax rate is22 percent, and the project discount rate is 12 percent. The devicehas an estimated Year 5 salvage value of $71,000. What level ofpretax cost savings do we require for this project to beprofitable? MACRS schedule. (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)
Answer & Explanation
Solved by verified expert
4.0 Ratings (610 Votes)
Time line
0
1
2
3
4
5
Cost of new machine
-680000
Initial working capital
-90000
=Initial Investment outlay
-770000
3
years MACR rate
33.33%
44.45%
14.81%
7.41%
0.00%
Savings
201713.15
201713.15
201713.15
201713.15
201713.15
-Depreciation
=Cost of
machine*MACR%
-226644
-302260
-100708
-50388
0
=Pretax cash flows
-24930.8529
-100546.9
101005.15
151325.15
201713.15
-taxes
=(Pretax
cash flows)*(1-tax)
-19446.0653
-78426.55
78784.015
118033.61
157336.25
+Depreciation
226644
302260
100708
50388
0
=after tax operating cash flow
207197.9347
223833.45
179492.01
168421.61
157336.25
reversal of working capital
90000
+Proceeds from sale of equipment after tax
=selling
price* ( 1 -tax rate)
55380
+Tax shield on salvage book value
=Salvage
value * tax rate
0
=Terminal year after tax cash flows
145380
Total Cash flow for the period
-770000
207197.9347
223833.45
179492.01
168421.61
302716.25
Discount factor=
(1+discount rate)^corresponding period
1
1.12
1.2544
1.404928
1.5735194
1.7623417
Discounted CF=
Cashflow/discount factor
-770000
184998.156
178438.66
127758.87
107034.98
171769.33
NPV=
Sum of discounted CF=
5.82077E-10
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Zin AI - Your personal assistant for all your inquiries!
