Question

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $66,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $28,800. A new piece of equipment will cost $156,000. 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 $ 66,000 58,000 56,000 54,000 51,000 40,000 The firm's tax rate is 25 percent and the cost of capital is 9 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.) Book value

Answer 1

purchase value = $66,000 Depreciation: 1st year % - 20% 1 ist year depreciation = 66,000 20 % = $13,200 and year depreciation = 66, ovo x 32'S. = $ 21,120 Book Value after two years = 66,001 - 13,260 -21,120 - $31,680 (6) Book value = $31,680 Current sale value= $28,800 since sale value less than Book value There will be a capital loss on sale of equipment. So there is no tax loss I on sale of old Equipment (6) Book value = $31,680 less: sale value = 28,500 loss on sale 2880 Tax rate = 25% I since there is capital loss Tax benefit= 2880x 25% = $120

Cash inflow= sale price & Tax Savings (benefits) 28,800 + 720 = $29,520 I net cost = purchase Less: inflow price from of new Equipment sale of old equipment so net Cost = $156,000 - $29,520 = $ 196, 480 \ (& depreciation schedule for new tQuipment :- MACRs depreciation (5 year property] depreciation % depreciation Annual depreciation 156,000 2044 [0-200 156,000 X20-%. - $31,900 156,000 19.947. [-192] = $49,920 156,000 * 19.24 - $ 29,952 year 'Base 391 [0.320] 156,000 X 32% 156000 156 000 156,000 11.526%. Cons) 156,000x1152'), = $17,911.2 11:52.4. Colls) 156,000 x11.524. = $11,911.2 5.16./.[0-058] 156,000 * 5.76%. - $8985.6 156,000 $8986

9 depreciation schedule for old equipment : I already ayears have elapsed so remaining life = 4years yr Dep. Base / Dep Annual depreciation 66,000 ,000 * 19.97 = $12,672 66,000 11.52% [0.115) 66,000 x 11:52) = $to 7603.2 66,000 11:52./C0115) 66,000x11524 = 4 66,000 5.76% [ 0.58) 66,000 45.76% = $3801.6 19 incremental depreciation will be upto year youly because 2 years has already elapsed since purchase of old machine year-I Depreciation on New Equipment (DN) = $31, 200 Depreciation on old tauipment (Do) = $12,612 (pepreciation values already calculated] mcremental depreciatia = Di-D. - 31,200 -12,672 Tax rate= 25% (0.gs] = $18,528 Tax Shield benefits = 18,528 x 25% = $4632

Du = $49,920 Do = $ 1603. 2 [ $1603] incremental= DN "Do = $42,317 [rounded of to - nearest dollar Tax shield = 42,317 x0.25 = $10,579 year-3 DN = $29,952 Do = $7,603 incremental = DN-D. - $ 22,349 Tan shield = 22,349 x0.25 = $5,587 year-u DN = $17,911 [rounded of Do = $3801 incremental= Dn-Do = $14,40 Tax shield = 14,170 x0.25 = $3543 to nearest dollar) Year-5 DN = $ 11, 911 Do = 0 [No depreciation] incremental = $ 17,971 Tax shield = 17,971x0.25 = $4993

year-6 DN = $8986 Do - o Incremental = $8986 Tax shield = 8986x0.25 = $2247 NOTE: For all above answers tax rate = 0.25 [i] 1 year 1- tax rate Sarings ($) 66,000 1-0.25= 0.15 After fax savings 66,000+ 0.15= 49500 S6,000 50-75 = (aSoo 56,000 X0-75 = 42,000 58,000 1-0.25 = 0.75 56,000 1-0.25=0.75 ou s wel - 54,000 1-0.25 = 0.75 54000 x 0.75 = 40,500 51,000 1-0.25 = 0.15 1-0.25=0.75 51,000 *0:15 - 38,250 40,000+ 0.15 = 30,000 40,000 year as wle - Taxshield benefits $ 4632 $ 10,579 $5,581 $ 3,543 $4,493 $2241 savings $49500 $ 43500 $ 12,000 $ 40,300 $36,250 $ 30,000 0 + Total benefits $ 54,132 $ 54,079 $ 47,587 $ 44,043 $ 42,743 $ 32,247

(5.2 present value Total annual benefits 54,132 54,019 perfactor @9% 0.91743 0.84168 47,587 0.71218 Present value $49,662 $ 45,517 $36,746 $ 31,201 $21, 180 $19,228 $ 210,134 44,043 0.70843 T as we - 42,743 0.64993 32,247 0.59627 present value present value of incremental benefits = $210,134 Net Cost of new equipment = $126, 480 SO NPV= $210,134 - $ 126,480 = $83,654 K-2 NPr is positive Based so replacement should be on the analysis undertaken NOTE: For all all above above answers answers rounded of to nearest in question. amounts are dollar as asked