The Lancaster Corporation purchased a piece of equipment three years ago for $25

Question

The Lancaster Corporation purchased a piece of equipment three years ago for $250,000. It has an asset depreciation range (MACRS) midpoint of six years. The old equipment can be sold for $97,920. A new piece of equipment can be purchased for $360,000. It also has an ADR of eight years. The firm has a 36% tax rate and a 9% cost of capital. Assume the old and new equipment would provide the following operating gains (or losses) over the next six years: Tax rate=36% and Cost of capital=9 % Year New Equipment Old Equipment 1 $100,000 $36,000 2 86,000 26,000 3 80,000 19,000 4 72,000 18,000 5 62,000 16,000 6 43,000 (9,000) a.What is the book value of the old equipment? b.What is the tax loss on the sale of the old equipment? c.What is the tax benefit from the sale? d.What is the cash inflow from the sale of the old equipment? e.What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.) f. Determine the depreciation schedule for the new equipment. g. Determine the depreciation schedule for the remaining years of the old equipment. h. Determine the incremental depreciation between the old and new equipment and the related tax shield benefits. i. Compute the aftertax benefits of the cost savings. j. Add the depreciation tax shield benefits and the aftertax cost savings, and determine the present value. (See Table 12-17 as an example.) k. Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e). Should the replacement be undertaken?

Explanation / Answer

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http://www.docstoc.com/docs/95677335/Chap012---DOC

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