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.

The firm’s tax rate is 30 percent and the cost of capital is 13 percent.

g. Determine the depreciation schedule for the remaining years of the old equipment. (Round the depreciation base and annual depreciation answers to the nearest whole dollar. Round the percentage depreciation factors to 3 decimal places.)

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h. Determine the incremental depreciation between the old and new equipment and the related tax shield benefits. (Enter the tax rate as a decimal rounded to 2 decimal places. Round all other answers to the nearest whole dollar.)

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Answer 1

1g) Year Depreciation Base % Depreciation 1 $ 92,000 0.192 2 $ 92,000 0.115 3 $ 92,000 0.115 4 $ 92,000 0.058 Annual depreciation $ 17,664 $ 10,580 $ 10,580 $ 5,336

1/ $ Depreciation on Depreciation on Incremental Tax Shield h) Year New Equipment Old Equipment Depreciation Tax Rate Benefits 60,000 $ 17,664 $ 42,336 0.30 $ 12,701 2 $ 96,000 $ 10,580 $ 85,420 0.30 $ 25,626 3 $ 57,600 $ 10,580 $ 47,020 0.30 $ 14,106 4 $ 34,500 $ 5,336 $ 29,164 0.30 $ 8,749 34,500 $ 34,500 0.30 $ 10,350 6 $ 17,400 $ 17,400 0.30 $ 5,220

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