Question

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $80,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $35,800. A new piece of equipment will cost $240,000. 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 OWN $ 62,000 52.000 50,000 48,000 45,000 34,000 The firm's tax rate is 30 percent and the cost of capital is 9 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.)

Answer 1

ANSWER a) o Cost $ 80.000 depreciation till date ($ 41600) ( 80000 Ⓡ (20% + 327 Book Value = $ 38400 Ondys 6) Tax Loss = $0 {ie Nic} (since the I will result [ loss asset is sold in ta benefit at a loss which and not a tax c) - Mool Value Value Tax Benefit - (loss on Sale) * (tax rate) = (Bole - Market) * (307) = ( 38400 – 3 5800) X 30. = $ 2600 x 30% = $780 Cash Inflow = Sale Value + Tax benefit 35800 + $ 36580 d) = 780