Question

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. Cash Year Savings 1 $ 70,000 60,000 58,000 56,000 53,000 42,000 6 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 $ (570)

Answer 1

Book value Depreciation base x (1 - Depreciation factors) $ 46,080 -96000*(1-0.2-0.32) a) S 2,28046080-43800 Book value Sales price Tax loss b) 5702280*25% Tax benefit Tax loss x Tax rate c) $ 44,37043800+570 Cash inflow Sales price Tax benefit d) $165,630210000-44370 e) Price of new equipment - Cash inflow Net cost

f) Year Depreciation Base% Depreciation Annual depreciation 1 $ 2$ 3 $ 4 $ 5$ 6 $ 0.200 $ 210,000 42,000 0.320 $ 0.192 $ 0.115 S 0.115 S 0.058 $ 210,000 67,200 210,000 40,320 210,000 24,150 210,000 24,150 210,000 12,180 g) Year Depreciation Base% Depreciation Annual depreciation 1 $ 2 $ 3$ 4$ 0.192 $ 96,000 18,432 0.115 $ 0.115 $ 0.058 $ 96,000 11,040 96,000 11,040 96,000 5,568

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