Question

information is in order last two screen shots are appendix.

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $96,000. The equipment falls into the five- year category for MACRS depreciation and can currently be sold for $43,800. A new piece of equipment will cost $320,000. 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. Cash Savings $70,000 60,000 58,000 56,000 53,000 42,000 Year 1 2 3 5 6 The firm's tax rate is percent and the cost of capital is 11 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 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 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 d. 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 inflow 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.) Net cost 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 Base Percentage Depreciation Annual Year Depreciation 1 2 3 5 6 0 g. 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.) Percentage Depreciation Annual Depreciation Base Year Depreciation 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 on New Equipment Depreciation on Old Equipment Incremental Depreciation Tax Shield Benefits Year Tax Rate 4 L Comeute the after i. Compute the aftertax benefits of the cost savings. (Enter the aftertax factor as a decimal rounded to 2 de answers to the nearest whole dollar.) places. Round all decimal Aftertax Savings Year Savings (1-Tax Rate) 1 70,000 2 60,000 58,000 3 4 56,000 5 53000 42000 j-1. Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual benefits. (Do not round intermedia calculations and round your answers to the nearest whole dollar.) Tax Shield Year Benefits from Depreciation Aftertax Cost Savings Total Annual Benefits 1 2 3 5 i-2. Compute the present value of the total annual benefits. (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Total annual benefits. k-1. Compare the present value of the incremental benefits 0 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.) Total annual benefits k-2. Should the replacement be undertaken? No Yes Table 12-12 Depreciation percentages (expressed in decimals) Depreciation Year 3-Year MACRS 5-Year 7-Year 10-Year 15-Year 20-Year MACRS MACRS MACRS MACRS MACRS 1 0.333 0.200 0.143 0.100 0.050 0.038 2............ 0.445 3 0.148 0.320 0.245 0.180 0.095 0.072 0.192 0.175 0.144 0.086 0.067 4 0.074 0.115 0.125 0.115 0.077 0.062 5 0.115 0.089 0.092 0.069 0.057 6 0.058 0.089 0.062 0.074 0.053 7 0.089 0.066 0.059 0.045 8 0.045 0.066 0.059 0.045 9 0.065 0.059 0.045 10 0.065 0.059 0.045 11 0.033 0.059 0.045 12 0.059 0.045 13 0.059 0.045 14 0.059 0.045 15 0.059 0.045 16 0.030 0.045 17 0.045 18 0.045 19 0.045 20 0.045 21 0.017 1.000 1.000 1.000 1.000 1.000 1.000 Appendix B. Appondlx B Present value of $1, PV 1 PV-FV 1+ Percent Period 1% 2% 3% 4% 6 % 5% 7 % 8% 9 % 0.917 0.990 0.980 10% 0.971 11% 0.962 12% 0.952 0.943 0.935 0.926 0.909 0.826 0.980 0.961 0.901 0.943 0.893 0.925 0.907 0.873 0.890 0.857 0.842 0.971 0.942 0.812 0.915 0.889 0.855 0.822 0.797 0.864 0.840 0.816 0794 0.772 0.961 0751 0.924 0.731 0.888 0712 0.823 0.792 0.763 0.735 0.683 0.906 0.708 0.951 0659 0.863 0.636 0.784 0.747 0713 0.681 0.630 0.583 0.650 0.942 0621 0.888 0.593 0.837 0.567 0.790 0746 0.705 0.666 0.596 0.933 0.564 0.871 0.535 0.507 0.813 0.760 0.665 0711 0.623 0.547 0.513 0.923 0.853 0.482 0.452 0.789 0.731 0.703 0.677 0.627 0582 0.540 0.502 0.914 0467 0.434 0.837 0.766 0.404 0.645 0.592 0.544 0.500 0.460 10 0.905 0424 0.391 0.820 0.361 0.744 0.676 0.614 0.558 0.508 0.463 0.422 11 0386 0.896 0.352 0.804 0.322 0.722 0.701 0.650 0.585 0.527 0.475 0.429 0.350 12 0.388 0.887 0.317 0.788 0.287 0.625 0.557 0497 0.444 0.397 0.356 13 0319 0286 025 0232 0.879 0.773 0.257 0.681 0.601 0.530 0469 0.415 0.368 0.326 14 0.290 0.870 0.758 0229 0.661 0.577 0.505 0.388 0442 0,299 0340 0.263 15 0.205 0.861 0.743 0.642 0.555 417 0481 0.362 0.315 16 0.275 0.239 0.853 0.209 0.183 0728 0.623 0.534 0.458 0394 0.339 0.292 0.252 0218 0.188 17 0.844 0.163 0714 0.605 0.513 0436 0371 0317 0270 0.231 18 0.836 0198 0.170 0.146 0.700 0.686 0.587 0.494 0416 0.350 0.296 0277 0250 0212 19 0.180 0.153 0.828 0.130 0.570 0.475 0.396 0.331 0232 0.194 0.164 20 0.138 0.820 0.116 0.673 0.554 0.456 0.377 0.312 0258 0215 0.178 Q149 25 0.124 Q.104 0.780 0.610 0.478 0.375 0.295 0.233 0.184 0146 0.116 a.0g2 30 0.074 0.552 0.059 0.742 0.412 0.308 0.231 0.174 0.131 0.099 0.075 40 a057 0.044 0.033 0.672 0.453 0.307 0.208 0.097 0.142 0046 0.021 0.067 0.032 0.022 50 0,608 0015 0011 0.372 0.228 0.087 0.141 0.054 0.034 0.013 0.009 0,005 0.003 Appendix B (concluded) Percent Period 13% 14% 15% 16% 17% 18% 19% 20% 30% 25 % 35 % 40% 50% 1 0.885 0.877 0.870 0.862 0.855 0.847 0840 0.833 0.094 0.579 0.482 0.800 0.760 0741 0714 0.667 0.783 0.769 0.756 0.743 0.731 0718 a706 0.593 0.640 0.592 0.510 0.549 0.444 0.693 0.675 0.658 0.641 0.624 0609 0.512 0.455 0406 0.364 0.296 0.613 0.552 0.592 0.572 0.534 0.515 0.499 0410 0.260 0.350 0301 0,198 0.543 0.519 0.456 0.497 0.476 0437 0419 0.402 0.328 0.262 0.269 0223 0.186 0132 0.088 0.480 0.456 0.432 0.410 0.390 0370 0.335 0.352 0.207 0165 0.133 0.425 0.400 0.333 0.285 0.376 0.354 0296 0.314 0.279 0.233 0.210 0.150 0.122 0.095 0.059 0.376 0.351 0.327 0.305 0.266 0249 0.168 0.091 0.067 0.050 0.037 0.123 0.039 0.068 0.333 0.308 0284 0.263 0.243 0.225 0209 0.094 a.194 0.134 0.107 0.048 0.026 0.295 0.270 0247 0.208 0.227 0.191 Q176 0.162 0.073 0035 0017 0012 0.008 0.237 0208 0.261 0215 0.195 0.178 0.162 0.148 0.135 0.086 0.056 0.025 12 0.231 0.187 0.168 0.152 0.137 0.124 0.069 0.065 0.112 0.027 0.000 0.043 0018 13. 0.204 0.182 0.163 0.145 0.130 0.116 Q.104 0.033 a.025 0.020 0.093 0013 0.005 14 0.181 0.160 0.141 0.125 0.078 0.111 0.099 0.088 0.074 0.062 0.052 a.044 0.015 0.009 0.003 15 0.160 0.140 0.123 0.108 0.093 0.080 0,095 0.064 0.035 0.065 0.006 0.002 0.011 16 0.141 0.123 0.107 0.093 0.054 0.081 0.071 0.008 0.028 0015 0.005 0.002 13 0.108 0.125 0.069 0.060 0.045 0.023 0012 0.006 0.003 a.001 18 0.111 0.095 0.083 0.081 0.069 0.060 0.059 0.044 0.051 0.043 0.037 0.009 0.002 0.002 0.038 0.018 0.014 C012 0.001 0.005 19 0.008 0.070 0.051 0.031 0.037 0.003 0002 0.001 0.007 20 0.087 0,047 0.073 0.061 0.043 0.051 0.031 0.026 0.010 0.005 0.001 25 0.030 0.038 .024 0.020 0.016 a013 0.004 0 001 0.001 0 30 0.026 0.020 0.015 0.009 0.005 0.012 0.007 0.004 0.008 0.005 0004 0.003 0.001 0.002 0.001 0.001 50 0.002 0.001 0.001 0.001

Answer 1

a.

Book Value

$ 46,080

Book value = $ 96,000 x [ 1 - ( 0.20 + 0.32 ) ] = $ 46,080

b.

Tax Loss

$ 0

There is no tax loss as there is no gain on sale of the old equipment. Sale proceeds are lower than the book value.

c.

Tax benefit

$ 912

Loss on sale of old equipment = $ 43,800 - $ 46,080 = $ 2,280

Tax benefit of the loss = $ 2,280 x 40 % = $ 912.

d.

Cash Inflow

$ 44,712

e.

Net Cost

$ 275,288

f.

Depreciation Schedule for the New Equipment
Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
1	$ 275,288	20 %	$ 55,058
2	275,288	32 %	88,092
3	275,288	19.2 %	52,855
4	275,288	11.5 %	31,658
5	275,288	11.5 %	31,658
6	275,288	5.8 %	15,967

g.

Depreciation Schedule for Old Equipment
Year	Depreciation Base	Percentage Depreciation	Annual Depreciation
1	$ 96,000	19.20 %	$ 18,432
2	96,000	11.50 %	11,040
3	96,000	11.50 %	11,040
4	96,000	5.80 %	5,568