Question
Hercules Exercise Equipment Company purchased a computerized measuring device two years ago for $62,000. The equipment falls into the five-year category for MACRS depreciation and
Hercules Exercise Equipment Company 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 25 percent and the cost of capital is 14 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 |
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 |
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 |
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 |
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.
Year | Depreciation Base | Percentage Depreciation | Annual Depreciation |
1 | |||
2 | |||
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 |
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