Hercules Exercise Equipment Company purchased a computerized measuring device two years ago for $80,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $35,800. A new piece of equipment will cost $240,000. 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	$ 62,000
2	52,000
3	50,000
4	48,000
5	45,000
6	34,000

The firms tax rate is 25 percent and the cost of capital is 9 percent.

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

Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.

book Value = 38,400

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

Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.

Tax loss = 2,600

c. What is the tax benefit from the sale?

Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.

Tax benefit = 650

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

Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.

Cash inflow = 36,450

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

Note: 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.

Note: Round the depreciation base and annual depreciation answers to the nearest whole dollar. Round the percentage depreciation factors to 3 decimal places.

Answer is not complete.

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

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

Note: 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
1
2
3
4

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

Note: 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
2
3
4
5
6

i. Compute the aftertax benefits of the cost savings.

Note: Enter the aftertax factor as a decimal rounded to 2 decimal places. Round all other answers to the nearest whole dollar.

Year	Savings	(1 Tax Rate)	Aftertax Savings
1	$62,000
2	52,000
3	50,000
4	48,000
5	45,000
6	34,000

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

Note: 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.

Note: 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).

Note: 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?

multiple choice

Yes

No