12-10. 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:

Performance Cost Savings Level (L) p(L) (1st yr; before taxes)

1 0.15 $22,500 2 0.25 35,000 3 0.35 44,200 4 0.25 59,800 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? (12.4)