A proposed cost-saving device has an installed cost of $820,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes (MACRS schedule). The required initial net working capital investment is $89,000, the tax rate is 22 percent, and the project discount rate is 8 percent. The device has an estimated Year 5 salvage value of $136,000. What level of pretax cost savings do we require for this project to be profitable? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Answer is complete but not entirely correct. Pretax cost savings $ 142,174.56 X
A proposed cost-saving device has an installed cost of $820,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes (MACRS schedule). The required initial net working capital investment is $89,000, the tax rate is 22 percent, and the project discount rate is 8 percent. The device has an estimated Year 5 salvage value of $136,000. What level of pretax cost savings do we require for this project to be profitable? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Answer is complete but not entirely correct. Pretax cost savings $ 142,174.56 X
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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100%
Transcribed Image Text:Table 9.7 Modified ACRS depreciation allowances
Property Class
Year
1
NT
2
3
4567
5
6
8
3-Year
33.33%
44.45
14.81
7.41
5-Year
20.00%
32.00
19.20
11.52
11.52
5.76
7-Year
14.29%
24.49
17.49
12.49
8.93
8.92
8.93
4.46
Transcribed Image Text:A proposed cost-saving device has an installed cost of $820,000. The device will be used in a five-year project but is classified as
three-year MACRS property for tax purposes (MACRS schedule). The required initial net working capital investment is $89,000, the tax
rate is 22 percent, and the project discount rate is 8 percent. The device has an estimated Year 5 salvage value of $136,000. What
level of pretax cost savings do we require for this project to be profitable?
Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.
X Answer is complete but not entirely correct.
Pretax cost
savings
$
142,174.56 X
Expert Solution
Introduction
Net Present Value of a project is the sum of the present value of all the expected cash flows. A positive NPV means it will add value to the organization.
Here, 3 year MACRS method of depreciation is used, hence in Year 5 there is no depreciation and the book value at the end of the project is zero.
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