Question

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $74,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $32,800. 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		Cash Savings
1		$	70,000
2			62,000
3			60,000
4			58,000
5			55,000
6			44,000

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

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.)
  

	Year Depreciation on New Equipment Depreciation on Old Equipment Incremental Depreciation Tax Rate Tax Shield Benefits 1 2 3 4 5 6

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.)
  

	Year Savings (1 − Tax Rate) Aftertax Savings 1 $70,000 2 62,000 3 60,000 4 58,000 5 55000 6 44000

j-1. Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual benefits. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
  

	Year Tax Shield Benefits from Depreciation Aftertax Cost Savings Total Annual Benefits 1 2 3 4 5 6

j-2. Compute the present value of the total annual benefits. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)
  

	Total annual benefits

k-1. Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e). (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to the nearest whole dollar.)
  

	Total annual benefits

Answer 1