Question

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $76,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $33,800. A new plece of equipment will cost $150,000. It also falls into the five-year category for MACRS depreciation. Assume the new equipment would provide the following stream of added cost savings for the next six years. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year 1 2 3 4 5 6 Cash Savings $60,000 50,000 48,eee 46,000 43,000 32,eee The firm's tax rate is 25 percent and the cost of capital is 14 percent. a. What is the book value of the old equipment? (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Book valueſ b. What is the tax loss on the sale of the old equipment? (Do not round Intermediate calculations and round your answer to the nearest whole dollar.) Tax loss

Answer 1

N9 A 1 Solution :- (A) 2 3 Year Cost of Machine Dep rate Dep Exps $76,000 20% $15,200 5 2 $76,000 32% $24,320 Total $39,520 4 $36,480 8 Book Value of Old Equipment = $76000 - $39520 = 9 10 (B) Tax Loss on Sale of Equipment 11 14 12 Book Value of Machine At year end 2 $36,480 13 Market Value of Machine at year end 2 $33,800 Tax Loss on Sale of Equipment | $2,680 15 16 (C) Tax Benefit from sale 17 18 Tax Loss on Sale of Equipment * Tax Rate ($2680 * 25%) 19 20 (D) Cashflow From Sale of Old Equipment 21 22 Selling Price + Tax Benefit on Sale ($33800 + $670) $670 $34,470

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