Question

A proposed cost-saving device has an installed cost of $790,000. 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 $77,000, the tax rate is 21 percent, and the project discount rate is 10 percent. The device has an estimated Year 5 salvage value of $118,000. What level of pretax cost savings do we require for this project to be profitable?

Answer 1

The pretax cost savings for project to be profitable will be more than $2,059,794 for the 5 years of life.

Step-by-step explanation:

Installed cost = $790,000

Initial working capital = $77,000

Tax rate = 21%

Project discount rate = 10%

Estimated salvage value = $118,000

Depreciable amount :

Installed cost $790,000

Salvage value 118,000

Net $672,000

Annual depreciation = $134,400 ($672,000/5)

Working capital = $77,000

Pretax cost savings = $211,400 x 1.61051 x 1.21

= $2,059,794