Question

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $56,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $23,800. A new piece of equipment will cost $146,000. 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. Cash Year Savings $ 61,000 53,000 51,000 49,000 46,000 35,000 2 3 4 5 6 The firm's tax rate is 30 percent and the cost of capital is 11 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 value 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 11:57 PM

Answer 1

Book value Depreciation base x (1- Depreciation factors) 26,880 =56000*(1-0.2-0.32) a) Book value Sales price $ 3,080 -26880-23800 b) Tax loss 924 3080*30% Tax benefit Tax loss x Tax rate c) $ 24,72423800+924 d) Cash inflow Sales price Tax benefit $121,276 146000-24724 Price of new equipment - Cash inflow e) Net cost

f) Year Depreciation Base % Depreciation Annual depreciation 1 $ 2 $ 3$ 0.200 $ 0.320 $ 146,000 29,200 146,000 46,720 0.192 $ 0.115 $ 146,000 28,032 4 $ 5 $ 6 $ 146,000 16,790 0.115 $ 146,000 16,790 0.058 $ 146,000 8,468 g) Year Depreciation Base % Depreciation Annual depreciation 1$ 2 $ 3$ 0.192 $ 56,000 10,752 0.115 $ 56,000 6,440 0.115 $ 56,000 6,440 4$ 0.058 $ 56,000 3,248

Depreciation on Year New Equipment 1$ 2$ 3 $ 4$ 5 $ 6 $ Depreciation on Incremental Old Equipment Depreciation Tax Rate Benefits Tax Shield h) 29,200 $ 46,720 $ 28,032 $ 16,790 $ 10,752 $ 6,440 $ 6,440 $ 3,248 $ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 18,448 5,534 40,280 12,084 21,592 6,478 4,063 13,542 $ 16,790 16,790 5,037 $ 8,468 8,468 2,540 Aftertax i) (1-Tax rate) 0.70 $ 0.70 $ 0.70 $ 0.70 $ Savings Year Savings 1$ 2 $ 3$ 4 $ 5 $ 6 $ 42,700 61,000 37,100 53,000 51,000 35,700 49,000 34,300 0.70 $ 0.70 $ 46,000 32,200 35,000 24,500 Total annual Aftertax j-1) Year Tax Shield Benefits 5,534 $ 12,084 $ 6,478 $ 4,063 $ 5,037 $ benefits Savings 1 $ 2$ 3 $ 42,700 48,234 37,100 $ 35,700 $ 34,300 $ 32,200 $ 24,500 $ 49,184 42,178 4 $ 5 $ 6 $ 38,363 37,237 2,540 27,040 j-2) Present value 176,039 k-1) Net present value $54,763 k-2) Yes, Should be replaced.

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