Question: An energy conservation project is being evaluated. Four levels of performance are considered feasible. The estimated probabilities of each performance level and the estimated before-tax cost savings in the first year are shown in the following table:
Assume the following:
• Initial capital investment: $100,000 [80% is depreciable property and the rest (20%) are costs that can be immediately expensed for tax purposes].
• The ADS under MACRS is being used. The ADS recovery period is four years.
• The before-tax cost savings are estimated to increase 6% per year after the first year.
• MARRAT = 12% per year; the analysis period is five years; MV5 = 0.
• The effective income tax rate is 40%. Based on E(PW) and after-tax analysis, should the project be implemented?