Question

Would you please resolve questions H, I. J-1. J-2, K-1, and K-2? Rest of the answers are already resolved.

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $96,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $43,800. A new piece of equipment will cost $210,000. 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 $70,000 60,000 58,000 56,000 53,000 42,000 The firm's tax rate is 25 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 $ 46,080 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 $ 2.280

Answer 1

h). Tax shield benefit = (depreciation of new equipment - depreciation of old equipment)*Tax rate

Formula T Tsb = ID*T Year (n) Dne Depreciation of new equipment 42000 67200 40320 24150 24150 Doe Depreciation of old equipment 18432 11040 1 2 ID = Dne - Doe Incremental depreciation 23568 56160 29280 18582 24150 Tax rate 25% 25% 3 11040 5568 Tax shield benefits 5892 14040 7320 4645.5 6037.5 3045 25% 25% 25% 25% 4 5 0 6 12180 0 12180

i).

Formula Year (n) S Savings 70000 (1-Tax rate) 0.75 ATS = 5*(1-Tax rate) Aftertax savings 52500 1 0.75 45000 N 3 60000 58000 56000 0.75 4 0.75 43500 42000 39750 31500 5 0.75 6 53000 42000 0.75

j-1).

Formula ATS TAB = Tsb + ATS Year (n) Tsb Tax shield benefit from depreciation 5892 14040 1 2 3 Aftertax cost savings 52500 45000 43500 42000 39750 31500 7320 4646 6038 Total annual benefits 58392 59040 50820 46646 45788 34545 4 5 6 3045

j-2). Present Value (PV) of total annual benefits = sum of PV of total annual benefits calculated in part (j-1)

= 58,392/(1+11%) + 59,040/(1+11%)^2 + 50,820/(1+11%)^3 + 46,646/(1+11%)^4 + 45,788/(1+11%)^5 + 34,545/(1+11%)^6 = 214,051

k-1). NPV of the replacement decision = -net cost of new equipment + PV of total annual benefits

= -165,630 + 214,051 = 48,421

k2). Since NPV of the replacement decision is positive, the replacement can be undertaken.