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Presentation/PPT
27/08/2022
Hercules Exercising Equipment Co. purchased a computerized measuring device two years ago for $60,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $23,800.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 12–9 and Appendix B.Year Cash flow1 $57,000 2 49,000 3 47,000 4 45,000 5 42,000 6 31,000 The firm’s tax rate is 35 percent and the cost of capital is 12 percent.(a) What is the book value of the old equipment? (Omit the “$” sign in your response.) Book value $ (b) What is the tax loss on the sale of the old equipment? (Omit the “$” sign in your response.) Tax loss $ (c) What is the tax benefit from the sale? (Omit the “$” sign in your response.) Tax benefit $ (d) What is the cash inflow from the sale of the old equipment? (Omit the “$” sign in your response.) Cash inflow $ (e) What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.) (Omit the “$” sign in your response.) Net cost $ (f) Determine the depreciation schedule for the new equipment. (Omit the “$” sign in your response.)Year DepreciationbasePercentagedepreciation Annualdepreciation $ (g) Determine the depreciation schedule for the remaining years of the old equipment. (Omit the “$” sign in your response.)Year DepreciationbasePercentagedepreciation Annualdepreciation(h) Determine the incremental depreciation between the old and new equipment and the related tax shield benefits. (Round all dollar values to the nearest whole number. Round “Tax rate” to 2 decimal places. Omit the “$” sign in your response.)Depreciationon newDepreciationon oldIncrementalTax rate Tax shield benefits $ 2 3 4 5 (i) Compute the aftertax benefits of the cost savings. (Round “Tax rate” to 2 decimal places. Omit the “$” sign in your response.)(1 − Tax rate) After taxsavings$ (j) Add the depreciation tax shield benefits and the aftertax cost savings, and determine the present value. (Round your intermediate and final answers to the nearest whole dollar amount. Omit the “$” sign in your response.)Year Tax shieldbenefits fromdepreciationAfter taxcost savings Total annualbenefits Present valuefactor Present value $ 2 4 5 6 $ (k) Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e). (Omit the “$” sign in your response.) Net present value $ (l) Should the replacement be undertaken?YesNo
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