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 1212. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year 1 2 3 4 5 6 Cash Savings $70,000 60,000 58,000 56,000 53,000 42,000 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 $ 2,280 c. What is the tax benefit from the sale? (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Tax benefit 570 d. What is the cash inflow from the sale of the old equipment? (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Cash inflow $ 44,370 e. What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Net cost $ 165,630 f. Determine the depreciation schedule for the new equipment. (Round the depreciation base and annual depreciation answers to the nearest whole dollar. Round the percentage depreciation factors to 3 decimal places.) Year 1 2 Depreciation Base $ 210,000 210,000 210,000 210,000 210,000 210,000 3 Percentage Annual Depreciation Depreciation 0.200 $ 42,000 0.320 67,200 0.192 40,320 0.115 24,150 0.115 24,150 0.058 12,180 $ 210,000 4 5 6 g. Determine the depreciation schedule for the remaining years of the old equipment. (Round the depreciation base and annual depreciation answers to the nearest whole dollar. Round the percentage depreciation factors to 3 decimal places.) Year 1 Depreciation Percentage Annual Base Depreciation Depreciation $ 96,000 0.192 $ 18,432 96,000 0.115 11,040 96,000 0.115 11,040 96,000/ 0.058 5,568 2 3 4 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 Tax Rate Tax Shield Benefits 0.25 $ 1 2 3 0.25 Depreciation Depreciation Incremental on New on Old Depreciation Equipment Equipment $ 42,000 $ 18,432 s 23,568 67,200 11,040 56,160 40.320 11,040 29,280 24,150 5,568 18,582 24,150 0 24,150 12,180 01 12,180 0.25 0.25 5,892 14,040 7,320 4,646 6,038 3,045 4 5 0.25 6 0.25 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 (1 - Tax Rate) Aftertax Savings 1 Savings $ 70,000 60,000 58,000 2 3 4 56,000 5 53,000 42,000 6 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.) Present value 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.) Net present value k-2. Should the replacement be undertaken? Yes O No 1 Appendix B Present value of $1, PVF PV=FV (67 [ = Percent Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 1 0.990 0.980 0.962 0.943 0.971 0.943 0.952 0.907 0.909 0.826 0.901 0.812 2 0.961 0.935 0.873 0.816 0.925 0.890 0.926 0.857 0.794 0.735 0.917 0.842 0.772 0.708 0.980 0.971 0.961 0.951 3 0.889 0.942 0.924 0.915 0.888 0.864 0.823 0.840 0.792 0.751 0.683 0.731 0.659 0.893 0.797 0.712 0.636 0.567 4 0.855 5 0.906 0.822 0.681 0.621 0.763 0.713 0.666 0.863 0.837 0.593 0.784 0.746 0.747 0.705 0.650 0.596 6 0.942 0.888 0.790 0.630 0.564 0.535 0.507 7 0.933 0.871 0.813 0.665 0.623 0.452 0.760 0.731 0.583 0.540 0.547 0.502 8 0.923 0.711 0.677 0.645 0.853 0.627 0.404 0.582 0.544 0.789 0.766 0.744 9 0.482 0.434 0.391 0.352 0.914 0.837 0.703 0.592 0.558 0.361 0.513 0.467 0.424 0.386 0.350 0.500 0.463 0.460 0.422 10 0.820 0.676 0.614 0.905 0.896 0.508 0.475 0.322 0.287 11 0.650 0.527 0.429 0.804 0.788 0.625 0.319 12 13 0.887 0.879 0.870 0.722 0.701 0.681 0.661 0.585 0.557 0.530 0.505 0.481 0.458 0.257 0.229 0.773 0.758 0.388 0.356 0.326 0.299 0.497 0.469 0.442 0.417 0.601 0.577 0.317 0.286 0.258 0.232 0.397 0.368 0.340 0.444 0.415 0.388 0.362 0.339 14 0.205 0.290 0.263 0.239 0.218 15 0.861 0.743 0.555 0.275 0.209 0.183 0.315 0.292 16 0.728 0.534 0.394 0.252 0.188 0.163 0.853 0.844 17 0.714 0.642 0.623 0.605 0.587 0.570 0.513 0.436 0.231 0.170 0.146 0.371 0.350 0.270 0.250 18 0.836 0.700 0.494 0.317 0.296 0.277 0.212 0.153 0.416 0.396 0.130 0.198 0.180 0.164 0.149 19 0.828 0.686 0.475 0.331 0.194 0.116 0.232 0.215 0.820 0.554 0.456 0.377 20 25 0.104 0.258 0.184 0.138 0.124 0.074 0.178 0.116 0.780 0.478 0.375 0.295 0.092 0.059 0.673 0.610 0.552 0.453 0.146 0.099 30 0.044 0.742 0.672 0.608 0.312 0.233 0.174 0.097 0.054 0.412 0.307 0.228 0.308 0.208 0.141 0.231 0.142 0.087 40 50 0.131 0.067 0.075 0.032 0.015 0.057 0.022 0.009 0.046 0.021 0.033 0.011 0.003 0.372 0.034 0.013 0.005 Appendix B (concluded) Present value of $1 Percent Period 13% 14% 15% 16% 17% 18% 19% 20% 25% 30% 35% 40% 50% 1 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.800 0.769 0.741 0.714 0.667 2 0.783 0.756 0.731 0.718 0.706 0.640 0.549 0.444 0.769 0.675 0.743 0.641 0.694 0.579 0.510 0.364 3 0.693 0.624 0.609 0.592 0.455 0.350 0.593 0.499 0.406 0.512 0.410 4 0.613 0.592 0.552 0.534 0.515 0.301 0.260 5 0.519 0.223 0.476 0.410 0.437 0.370 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.328 0.262 6 0.456 0.543 0.480 0.425 0.376 0.333 0.419 0.352 0.296 0.165 0.296 0.198 0.132 0.088 0.059 0.039 0.482 0.402 0.335 0.279 0.233 0.194 7 0.456 0.390 0.333 0.285 0.243 0.400 0.351 0.122 0.354 0.305 0.263 0.269 0.207 0.159 0.123 0.094 0.314 0.266 0.225 8 0.186 0.133 0.095 0.068 0.048 0.210 0.168 0.134 0.249 0.209 0.091 0.067 9 0.308 0.026 10 0.295 0.270 0.227 0.191 0.176 0.073 0.050 0.247 0.215 0.208 0.178 0.107 0.086 0.035 0.025 0.017 0.012 11 0.261 0.237 0.195 0.162 0.148 0.056 0.037 12 0.208 0.187 0.152 0.231 0.204 0.043 0.168 0.145 0.162 0.135 0.112 0.093 0.078 0.124 0.104 0.069 0.055 0.137 0.116 0.099 0.027 0.020 13 0.182 0.160 0.130 0.111 0.163 0.141 0.123 14 0.008 0.005 0.003 0.181 0.125 0.033 0.025 0.020 0.088 0.015 15 0.140 0.095 0.084 0.074 0.065 0.011 0.008 0.002 0.002 16 0.018 0.013 0.009 0.006 0.005 0.003 0.002 0.002 0.123 0.107 0.081 0.062 0.015 0.054 0.045 17 0.044 0.035 0.028 0.023 0.018 0.014 0.108 0.093 0.080 0.069 0.060 0.093 0.160 0.141 0.125 0.111 0.098 0.087 0.047 0.052 0.108 0.095 0.071 0.060 0.051 0.043 0.069 0.059 0.001 0.001 18 0.038 19 0.051 0.083 0.073 0.081 0.070 0.061 0.030 0.044 0.037 0.031 0.013 0.031 0.026 0.012 0.009 0.007 0.005 0.001 0.006 0.005 0.003 0.002 0.001 20 0.001 0.051 0.024 0.043 0.020 0.037 0.016 0.012 0.004 25 0.010 0.038 0.020 30 0.026 0.012 0.009 0.005 0.001 0.007 0.001 0.004 0.001 0.015 0.004 0.001 40 0.008 0.005 0.003 0.002 0.001 0 50 0.002 0.001 0.001 o o o o o