Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $62,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $26,800. A new piece of equipment will cost $152,000. 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 | | $ | 64,000 | |
| 2 | | | 56,000 | |
| 3 | | | 54,000 | |
| 4 | | | 52,000 | |
| 5 | | | 49,000 | |
| 6 | | | 38,000 | |
| |
The firms tax rate is 30 percent and the cost of capital is 14 percent.
Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $62,000. The equipment fails into the five-year category for MACRS depreciation and can currently be sold for $26.800. A new piece of equipment will cost $152,000. 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 Year 1 2 Savings S64000 6 000 The firm's tax rate is 30 percent and the cost of capital is 14 percent a. What is the book value of the old equipment? (Do not round Intermediate calculations an rest whole dollar) Book Value $ 29,760 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) Taxoss $ 2980 c. What is the tax benefit from the sale(Do not round intermediate calculations and round your answer to the nearest whole dollar) Tax benett a. 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.) Yer Depreciation $ 11.904 1 2 Depreciation Percentage Depreciation $ 62.000 0.192 62.000 0.115 62,000 0.115 62.0001 0.058 7.130 3.596 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 Depreciation on New Equipment Depreciation on Old Equipment Incremental Depreciation Tax Rate Tax Shield Benefits 1. 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) Aftertax 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 Aftertas Savings (1 - Tax Rate) 64,000 56.000 54,000 520001 49000 38000 |-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 nearest whole dollar.) Year Tax Shield Benefits from Depreciation Altertax Cost Savings Total Annual Benefits 2 1-2. Compute the present value of the total annual benefits (Do not round Intermediate calculations and round your answer to the nearest whole dollar) Table 12-12 Depreciation percentages (expressed in decimals) Depreciation Year 7-Year MACRS 20-Year MACRS 0.143 3-Year 5-Year MACRS MACRS 0.333 0.200 0.445 0.320 0.148 0.192 0.074 0.115 0.115 0.058 0.245 0.175 0.125 0.089 0.089 0.089 0.045 10-Year MACRS 0.100 0.180 0.144 0.115 0.092 0.074 0.066 0.066 0.065 0.065 0.033 15-Year MACRS 0.050 0.095 0.086 0.077 0.069 0.062 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.059 0.030 0.038 0.072 0.067 0.062 0.057 0.053 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.045 0.017 1.000 1.000 1.000 1.000 1.000 1.000 Appendix B Present value of 51, PV, PV-v... Period 6050 0.962 0.925 0.952 0.907 0.935 0873 0.001 0.812 0917 OM TT2 0708 0.890 0.797 0712 0.913 0.890 O O 0.792 0.747 0.705 0.665 0.627 0.751 60 0.621 0.763 0.713 06.66 03 0.52 0.650 0.500 0.535 0.596 0.567 0513 0.667 0.5 0544 0.500 0.450 0.02 0.361 0.722 CO 15293% 0.990 0.00 0.971 0.980 0061 0915 0961 0994 0.88 0.951 0.906 000 0837 0 0903 0.853 078 0.914 0837 0.766 OSOS 0744 0.306 0.804 0.788 0.701 0.879 0.773 0.681 0870 0.758 0.661 0.61 0.74 0.542 0.853 0.728 0.623 0.844 0.714 0.805 0836 0.700 0587 0.828 0.686 ORO 0.673 0554 0.780 0.610 0.478 0.742 0.552 0.412 0672 0.453 0.307 0.008 0.372 0.228 0.558 0.527 0.497 0.469 0.855 0.822 0.790 0760 0.731 0.703 0.675 0.650 0.625 0.601 0.577 0555 0.534 0513 0.494 0.475 0.456 0.375 0.308 0.208 0.141 0.784 0.746 0.711 0677 0545 0614 0585 0.557 0.530 0.505 0.481 0458 0436 0416 0.396 0377 0.295 0.231 0.142 0.087 0.352 0.317 0.286 0.258 0.926 OAST 0.74 0.735 0.681 0.630 0.583 0540 0.500 0.083 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0250 0.232 0.215 0.146 0.099 0.508 0475 0.44 0.415 0.388 0.362 0.339 0.317 0296 0277 0.258 0.184 0.131 0.350 0.319 0.280 0.263 0239 0218 0.257 0229 0.205 19 0.163 0.417 0.394 0.371 0.350 0.331 0.312 0.223 0.174 0.356 0.326 0.299 0275 0.252 0231 0212 0.194 0.178 0.116 0075 0.032 0.013 0180 0.164 0.149 0.200 0.18 0.170 0.153 0.138 0.124 0.074 0.044 0.09 0.130 0.116 0.104 0.059 0.033 0.011 0.003 0067 0.046 0.057 0.022 0.000 0097 0.054 0015 0.034 0.021 0.005 Appendix B (concluded) Period 50% 0 0.444 0 16% 0 0 0 0.743 0.541 0.552 0.476 0.410 0.354 13% 0 0.783 0.003 0.613 0.543 0.480 0.425 0375 0.303 0295 0.21 40% 0 - 0510 0364 0.20 0.138 0.455 4 WOO 0900 0.000 17% 0 863 .731 0.624 0.534 0.456 0.300 0.333 0.285 0.243 0.200 0.178 0.152 0.130 0.111 0.005 0081 0 000 0.059 0.051 0.043 0.005 0.068 0048 0.005 0.025 0.191 0.017 14% 15% 0 0 0 0.750 0.756 0.675 0.658 0.502 0572 0.519 0.497 0.456 0.43 0.400 0 378 0351 0.327 0308 0.284 0270 0247 0.237 0215 0.187 16 0.163 01600141 0.140 0.123 0.123 0.107 0.108 0.03 0.005 0.083 DOPO 0073 0.061 0.00 0.020 0.015 0.005 0.004 0.001 0.001 Percent 18% 10% 20% 25% 07 030 029 080 0.718 0.706 0.894 0.840 0.609 0593 0579 0.512 0.515 0.499 0.482 0.410 0.419 0.402 02 0.370 0.352 0.335 0.262 0.314 0.296 0.279 0.210 0256 0249 0.168 0.209 0.194 0.134 0.178 0.162 0.107 120108 0.135 00 137 0124 0.112 0.069 0.116 0.104 0.093 0.055 DOS OS 0044 0.084 01074 0.065 0.035 071 0.02 0.054 0028 0.060 0 052 0.045 0.023 0.051 0.044 0.035 0.018 0.03 0.037 0.031 0014 0ST 0.031 0.026 0.012 0016 0.013 0.0100 004 0.007 0.005 0004 0.001 0.001 0.001 0.001 0 0 30% 35% 079 074 0.592 0.549 0.406 03500301 0.289 0.223 0.207 165 150 0122 0.123 0.091 0.094 0067 0073 0 OSO 0056 0.007 0000027 0.00 0.00 0.025 0.015 0.0200 .011 0.015 0.008 0.0120.000 0.009 0005 0.007 0.005 0002 0.001 0.001 0 0.012 0263 0.227 0195 0.168 0.145 0.125 0.108 0.083 0.080 0.069 0.00 0.051 0.004 2013 0.204 181 0.160 0.141 0.125 0.111 0.00 OOST 0.047 0.06 0.003 0.002 0.00 0.00 0.002 000 0.001 0.001 0.081 005 0.000 0.002 0002 0.001 0012 0.009 0.002 0.003 0.001 0 OOOO 0 0
