Question

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $94,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $42,800. A new piece of equipment will cost $255,000. 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 $ 1 2 4 69,000 59,000 57,000 55,000 3 52000 6 41,000 The firm's tax rate is 25 percent and the cost of capital is 10 percent. e. What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Net oost f. Determine the depreciation schedule for the new equipment. (Round the depreciation base and annual depreciation answers to the nearest whole dollar. Round the percentage depreciation factors to 3 decimal places.) Depreciation Base Percentage Depreciation Annual Depreciation 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.) Your Depreciation Percentage Annual Base Depreciation Depreciation 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.) Depreciation Depreciation Tax Shield on New on Old Depreciation Benefits Equipment Equipment Incremental T Rate i. Compute the aftertax benefits of the cost savings. (Enter the aftertax factor as a decimal rounded to 2 decimal places. Round all other answers to the nearest whole dollar.)

Answer 1

e.

Net cost

$ 211,620

Accumulated depreciation on the old equipment = $ 94,000 * ( 0.200 + 0.320) = $ 48,880

Book value = $ 94,000 - $ 48,880 = $ 45,120

Tax effect of loss = $ ( 42,800 - 45,120 ) * 25 % = - $ 580

After tax sale proceeds of old equipment = $ 42,800 - ( - 580) = $ 43,380

Net cost = $ 255,000 - $ 43,380 = $ 211,620

f.

Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
1	$ 255,000	0.200	$ 51,000
2	255,000	0.320	81,600
3	255,000	0.192	48,960
4	255,000	0.115	29,325
5	255,000	0.115	29,325
6	255,000	0.058	14,790

g.

Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
1	$ 94,000	0.192	$ 18,048
2	94,000	0.115	10,810
3	94,000	0.115	10,810
4	94,000	0.058	5,452

h.

Year	Depreciation on New Equipment	Depreciation on Old Equipment	Incremental Depreciation	Tax Rate	Tax Shield Benefits
1	$ 51,000	$ 18,048	$ 32,952	0.25	$ 8,238
2	81,600	10,810	70,790	0.25	17,698
3	48,960	10,810	38,150	0.25	9,538
4	29,325	5,452	23,873	0.25	5,968
5	29,325	0	29,325	0.25	7,331
6	14,790	0	14,790	0.25	3,698

i.

Year	Savings	(1 - Tax Rate)	After Tax Savings
1.	$ 69,000	0.75	$ 51,750
2.	59,000	0.75	44,250
3.	57,000	0.75	42,750
4.	55,000	0.75	41,250
5.	52,000	0.75	39,000
6.	41,000	0.75	30,750