Question

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $92,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $41,800. A new piece of equipment will cost $300,000. 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 Cash Savings $ 68,000 58,000 56,000 54,000 51,000 40.000 The firm's tax rate is 30 percent and the cost of capital is 13 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 c. What is the tax benefit from the sale? (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Tax benefit d. What is the cash inflow from the sale of the old equipment? (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Cash inflow

Answer 1

a) Book value Depreciation base x (1 – Depreciation factors) $ 44,160 =92000*(1-0.2-0.32) b) Tax loss Book value-Sales price $ 2,360 -44160-41800 c) Tax benefit Tax loss Tax rate $ 708 -2360*30% d) Cash inflow Sales price + Tax benefit $ 42,508 =41800+708 e) Net cost Price of new equipment - Cash inflow $257,492 -300000-42508

f) Year Depreciation Base % Depreciation 1 $ 300,000 0.200 2 $ 300,000 0.320 300,000 0.192 300,000 0.115 5 $ 300,000 0.115 6 $ 300,000 0.058 Annual depreciation $ 60,000 $ 96,000 $ 57,600 $ 34,500 $ 34,500 $ 17,400 4 $ g) Year Depreciation Base % Depreciation Annual depreciation 1 $ 92,000 0.192 $ 17,664 2 $ 92,000 0.115 $ 10,580 92,000 0.115 $ 10,580 92,000 0.058 $ 5,336 3 $ 141 $

h) Depreciation on Year New Equipment 1 $ 60,000 2 $ 96,000 3 $ 57,600 4 $ 34,500 5 $ 34,500 6 $ 17,400 Depreciation on Incremental Tax Shield Old Equipment Depreciation Tax Rate Benefits $ 17,664 $ 42,336 0.30 $ 12,701 $ 10,580 $ 85,420 0.30 $ 25,626 $ 10,580 $ 47,020 0.30 $ 14,106 $ 5,336 $ 29,164 0.30 $ 8,749 $ 34,500 0.30 $ 10,350 $ 17,400 0.30 $ 5,220 1 $ 2 $ 3 $ 4 $ 5 $ 6 $ Savings 68,000 58,000 56,000 54,000 51,000 40,000 Aftertax (1-Tax rate) Savings 0.70 $ 47,600 0.70 $ 40,600 0.70 $ 39,200 0.70 $ 37,800 0.70 $ 35,700 0.70 $ 28,000 Year Tax Shield Benefits 1 $ 12,701 $ 2 $ 25,626 $ 3 $ 14,106 $ 4 $ 8,749 $ 5 $ 10,350 $ 6 $ 5,220 $ Aftertax Total annual Savings benefits 47,600 $ 60,301 40,600 $ 66,226 39,200 $ 53,306 37,800 $ 46,549 35,700 $ 46,050 28,000 $ 33,220 ,-2) Present value $ 211,672 k-1) Net present value -$45,820 K-2) No

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