Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $58,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $24,800.

A new piece of equipment will cost $148,000. 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.

Year	Cash Savings
1	$62,000
2	54,000
3	52,000
4	50,000
5	47,000
6	36,000

The firms tax rate is 35 percent and the cost of capital is 12 percent.

a.	What is the book value of the old equipment?

Book value

$

b.	What is the tax loss on the sale of the old equipment?

Tax loss

$

c.	What is the tax benefit from the sale?

Tax benefit

$

d.	What is the cash inflow from the sale of the old equipment?

Cash inflow

$

e.	What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.)

Net cost

$

f.	Determine the depreciation schedule for the new equipment.

Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
1	$		$
2
3
4
5
6
			$

g.	Determine the depreciation schedule for the remaining years of the old equipment.

Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
1	$		$
2
3
4

h.	Determine the incremental depreciation between the old and new equipment and the related tax shield benefits.

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.

Year	Savings	(1 ? Tax Rate)	Aftertax Savings
1	$62,000		$
2	54,000
3	52,000
4	50,000
5	47,000
6	36,000

j-1.	Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual benefits.

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.

Total annual benefits

$

k-1.	Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e).

Net present value

$

k-2.

Should the replacement be undertaken?

	Yes
	No