Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $68,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $29,800. A new piece of equipment will cost $158,000. 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		Cash Savings
1		$	67,000
2			59,000
3			57,000
4			55,000
5			52,000
6			41,000

The firms tax rate is 25 percent and the cost of capital is 10 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.)

32640 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.)

2840 c. What is the tax benefit from the sale? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

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.)

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.)

k-2. Should the replacement be undertaken?

multiple choice

• Yes

• No

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 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 t. Determine the depreciation schedule for the new equipment. (Round the depreciation base and annual depreciation answers to the nearest whole doller. Round the percentage depreciation factors to 3 declmal places.) Year 1 2 3 Depreciation Base S 158,000 158,000 158,000 158,000 158,000 158,000 Percentage Depreciation 0.200 0.320 0.192 0.115 0.115 0.058 Annual Depreciation S 31,600 50,560 30,336 18,170 18,170 9,164 S 158,000 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 Base s 68,000 68,000 68,000 68,000 Percentage Depreciation 0.192 0.115 0.115 2 Annual Depreciation S 13,056 7.820 7.820 3,944 3 4 0.058 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 Incremental Depreciation Tax Rate Tax Shield Benefits 1 S S 2 3 Depreciation Depreciation on New on Old Equipment Equipment S 31,600 s 13,056 50,560 7,820 30,336 7,820 18,170 3,944 18,170 0 9,164 0 18,544 42,740 22,516 14,228 18,170 0.25 0.25 0.25 0.25 0.25 4,636 10.685 5,629 3,557 4,543 2,291 4 5 8 9,164 0.25 1. Compute the aftertax benefits of the cost savings. (Enter the aftertax factor as a declmal rounded to 2 decimal places. Round all other answers to the nearest whole dollar.) Year 1 2 3 Savings S 67,000 59,000 57,000 55,000 52.000 41,000 (1 - Tax Rate) Aftertax Savings 0.75s 50.250 0.75 44,250 0.75 42.750 0.75 41,250 0.75 39,000 0.75 30.750 4 5 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 Total Annual Benefits 1 Tax Shield Benefits from Depreciation 4,636 10.685 5,629 3,557 2 Aftertax Cost Savings 50,250 44,250 42.750 41.250 39,000 30.750 3 54,888 54,935 48,379 44,807 43,543 33,041 4 5 4,543 2.291 6