Question

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $90,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $40,800. A new piece of equipment will cost $290,000. 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 Ycar savings 1 S67,000 57,000 55,000 53,000 50,000 39,000 6 The firm's tax rate Is 40 percent and the cost of capltal Is 14 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.) Tax loss c. What is the tax benefit from the sale? (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Tax benefi

Answer 1

a. Purchase price = 90,000

MACRS 5 year depreciation for first two year = 20% = 32% = 52%

Book Value = 90,000*(1-0.52) = 43,200

Book value of the old Machine = $43,200

b. Tax loss on Sale = Book Value - Sale price =43,200 -40,800 = 2,400

Tax loss on Sale =$2,400

c. Tax benefit from the sale = Loss * tax rate = 2,400 * 0.4 = 960

Tax benefit from the sale = $960

d. Cash inflow from sale of old equipment = 40,800 + 960 = 41,760

Cash inflow from sale of old equipment = 41,760

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