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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 piece 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 1212. Use mum for an approximate answer but calculate your final answer using the formula and financial calculator methods. Cash Savings 1 $60,000 2 50,000 3 48,000 4 46,000 5 6 Year 43,000 32,000 F The firm's tax rate is 25 percent and the cost of capital is 14 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.) s 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.) Tax loss $ 2,680 c. What is the tax benefit from the sale? (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Tax benefit $ 670d. 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 inow $ 34,470 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.) 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.) Depreciation Percentage Annual Base Depreciation Depreciation $ 150,000 m as 30,000 150,000 0.320 48,000 $ 150,000 9. 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.) Depreciation Percentage Annual Base Depreciation Depreciation 0.192 $ 0.115 0.115 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.) Depreciation Depreciation Year on New on Old Incremental Tax Rate Tax Shield Equipment Equipment Depreciation Benefits $ 30,000 $ 14,592 $ 15,408 0.25 $ 3,852 2 48,000 8,740 39,260 0.25 9,815 3 28,800 8,740 20,060 0.25 5,015 4 17,250 4,408 12,842 0.25 3,211 17,250 17,250 0.25 4,313 6 8,700 8,700 0.25 2, 175i. 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 Savings (1 - Tax Rate) Aertax Savings j-1. Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual benets. (Do not round intermediate calculations and round your answers to the nearest whole dollar.) Tax Shield Year Benets from Depreciation 9,815 37,500 47,315 5,015 36,000 41,015 Aftertax Cost Total Annual Savings Benefits 4,313 32,250 36,563 2,175 24,000 26,175 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 benets (1) 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.) Net present value
