Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $76,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $33,800. A new plece of equipment will cost $150,000. 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 Cash Savings $60,000 50,000 48,000 46,000 43,000 32,000 6 The firm's tax rate is 25 percent and the cost of capital is 14 percent. 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 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 Depreciation Base Percentage Depreciation Annual Depreciation 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 Depreciation Base Percentage Depreciation Annual Depreciation 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 WN 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.) Year (1 - Tax Rate) Aftertax Savings Savings 60,000 50,000 48,000 46,000 43,000 32,000 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.) Tax Shield Aftertax Cost Year Benefits from Depreciation Total Annual Benefits Savings 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.) Present value K-1. Compare the present value of the Incremental benefits to the net cost of the new equipment (el (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
