Problem A-19 (Static) Compute Net Present Value Dungan Corporation is evaluating a proposal to purchase a new drill press to replace a less efficient machine presently in use. The cost of the new equipment at time 0, including delivery and installation, is $200,000. If it is purchased, Dungan will incur costs of $5,000 to remove the present equipment and revamp its facilities. This $5,000 is tax deductible at time 0. Depreciation for tax purposes will be allowed as follows: year 1, $40,000; year 2, $70,000; and in each of years 3 through 5, $30,000 per year. The existing equipment has a book and tax value of $100,000 and a remaining useful life of 10 years. However, the existing equipment can be sold for only $40,000 and is being depreciated for book and tax purposes using the straight-line method over its actual life. Management has provided you with the following comparative manufacturing cost data. Preent Equipment Equipment Annual capacity (units) 400,000 400,000 Annual costs: Labor $ 30,000 $ 25,000 Depreciation 10,000 14,000 Other (all cash) 48,000 20,000 Total annual costs $ 88,000 $ 59,000 New The existing equipment is expected to have a salvage value equal to its removal costs at the end of 10 years. The new equipment is expected to have a salvage value of $60,000 at the end of 10 years, which will be taxable, and no removal costs. No changes in working capital are required with the purchase of the new equipment. The sales force does not expect any changes in the volume of sales over the next 10 years. The company's cost of capital is 16 percent, and its tax rate is 25 percent. Use Exhibit A.8. Required: a. Calculate the removal costs of the existing equipment net of tax effects. b. Compute the depreciation tax shield. (Round PV factor to 3 decimal places.) c. Compute the forcone tax benefits of the old equipment The existing equipment is expected to have a salvage value equal to its removal costs at the end of 10 years. The new equipment is expected to have a salvage value of $60,000 at the end of 10 years, which will be taxable, and no removal costs. No changes in working capital are required with the purchase of the new equipment. The sales force does not expect any changes in the volume of sales over the next 10 years. The company's cost of capital is 16 percent, and its tax rate is 25 percent. Use Exhibit A.8. Required: a. Calculate the removal costs of the existing equipment net of tax effects. b. Compute the depreciation tax shield. (Round PV factor to 3 decimal places.) c. Compute the forgone tax benefits of the old equipment d. Calculate the cash intlow, net of taxes, from the sale of the new equipment in year 10. e. Calculate the tax benefit arising from the loss on the old equipment. f. Compute the annual differential cash flows arising from the investment in years 1 through 10. g. Compute the net present value of the project. (Round your intermediate values to the nearest whole dollars.) Answer is complete but not entirely correct. a b d. Equipment removal net of tax effects Depreciation tax shield Forgone tax benefits Gain from salvage of new equipment Tax benefit arising from loss on old equipment Differential cash flows Net present value $ 2,000 $ 12,000 $ 4,000 $ 35,000 $ 24,000 $ 33,000 $ 62,537 1. 9 Exercise A-13 (Static) Present Value of Cash Flows Rush Corporation plans to acquire production equipment for $600,000 that will be depreciated for tax purposes as follows: year 1, $120,000; year 2. $210,000; and in each of years 3 through 5, $90,000 per year. An 8 percent discount rate is appropriate for this asset, and the company's tax rate is 25 percent. Use Exhibit A.8 and Exhibit A.9. Required: a. Compute the present value of the tax shield resulting from depreciation. b. Compute the present value of the tax shield from depreciation assuming straight-line depreciation ($120,000 per year). Complete this question by entering your answers in the tabs below. Required A Required B Compute the present value of the tax shield resulting from depreciation. (Round PV factor to 3 decimal places.) Present value of the tax shield Required B > Exercise A-13 (Static) Present Value of Cash Flows Rush Corporation plans to acquire production equipment for $600,000 that will be depreciated for tax purposes as follows: year 1, $120,000; year 2, $210,000; and in each of years 3 through 5, $90,000 per year. An 8 percent discount rate is appropriate for this asset, and the company's tax rate is 25 percent. Use Exhibit A.8 and Exhibit A.9. Required: a. Compute the present value of the tax shield resulting from depreciation. b. Compute the present value of the tax shield from depreciation assuming straight-line depreciation ($120,000 per year). Complete this question by entering your answers in the tabs below. Required A Required B Compute the present value of the tax shield from depreciation assuming straight-line depreciation ($120,000 per year). (Round PV factor to 3 decimal places.) Present value of the tax shield (Required A