Question

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $78,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $34,800. A new piece of equipment will cost $230,000. 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		Cash Savings
1		$	61,000
2			51,000
3			49,000
4			47,000
5			44,000
6			33,000

The firm’s tax rate is 25 percent and the cost of capital is 10 percent.

k-1. Compare the present value of the incremental benefits (j) 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.)

The answer is NOT $1504

Please Help Solve 

Answer 1

a) Book value Depreciation base x (1 – Depreciation factors) $ 37,440 =78000*(1-0.2-0.32) b) Tax loss Book value - Sales price $ 2,640 =37440-34800 c) Tax benefit Tax loss x Tax rate $ 660 =2640*25% d) Cash inflow Sales price + Tax benefit $ 35,460 =34800+660 e) Net cost Price of new equipment - Cash inflow $ 194,540 =230000-35460

f) Year Depreciation Base 1 $ 230,000 2 $ 230,000 3 $ 230,000 4 $ 230,000 % Depreciation Annual depreciation 0.200 $ 46,000 0.320$ 73,600 0.192 $ 44,160 0.115$ 26,450 5 $ 0.115$ 230,000 230,000 26,450 13,340 6 $ 0.058 $ g) Year Depreciation Base 1 $ 78,000 78,000 % Depreciation Annual depreciation 0.192 $ 14,976 0.115$ 8,970 0.115$ 8,970 2 $ 3 $ 78,000 78,000 4 $ 0.058$ 4,524

h) Depreciation on Depreciation on Incremental Tax Shield Year New Equipment Old Equipment Depreciation Tax Rate Benefits 1 $ 46,000 $ 14,976 $ 31,024 0.25 $ 7,756 2 $ 73,600 $ 8,970 $ 64,630 0.25 $ 16,158 3 $ 44,160 $ 8,970$ 35,190 0.25 $ 8,798 4 $ 26,450 $ 4,524 $ 21,926 0.25 $ 5,482 5 $ 26,450 $ 26,450 0.25 $ 6,613 6 $ 13,340 $ 13,340 0.25 $ 3,335 i) Year Savings 1 $ 61,000 51,000 2 $ Aftertax (1-Tax rate) Savings 0.75 $ 45,750 0.75 $ 38,250 0.75 $ 36,750 0.75 $ 35,250 0.75 $ 33,000 3 $ 49,000 4 $ 47,000 44,000 5 $ 6 $ 33,000 0.75 $ 24,750 Tax Shield Benefits j-1) Year 1 $ 7,756 $ 2 $ 16,158$ 8,798 $ Aftertax Total annual Savings benefits 45,750 $ 53,506 38,250 $ 54,408 36,750 $ 45,548 35,250 $ 40,732 33,000 $ 39,613 24,750 $ 28,085 3 $ 4 $ 5 $ 5,482 $ 6,613 $ 3,335$ 6 $ j-2) Present value $ 196,097 k-1) Net present value $ 1,557 k-2) Yes, Should be replaced