Hercules Exercise Equipment Co. purchased a computerized measuring device two ye

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.

What is the book value of the old equipment? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

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.)

What is the tax benefit from the sale? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

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.)

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.)

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.)

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.)

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.)

Compute the aftertax benefits of the cost savings. (Enter the aftertax factor as a decimal rounded to 2 decimal places. Round all other answers to the nearest whole dollar.)

Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual benefits. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

Compute the present value of the total annual benefits. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

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.)

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.

Explanation / Answer

Since, there are multiple parts to the question, the first five have been answered.

________

Part A)

The book value of old equipment is calculated with the use of following table:

_______

Part B)

The tax loss on the sale of old equipment is calculated with the use of following table:

_______

Part C)

The tax benefit from sale is calculated as follows:

Tax Benefit from Sale = Tax Loss on Sale*Tax Rate = 2,880*40% = $1,152

_______

Part D)

The cash inflow from sale of old equipment is calculated as follows:

Cash Inflow from Sale of Old Equipment = Sales Value + Tax Benefit from Sale = 28,800 + 1,152 = $29,952

_______

Part E)

The net cost of new equipment is calculated as follows:

Net Cost of New Equipment = Cost of New Machine - Cash Inflow from Sale of Old Equipment = 156,000 - 29,952 = $126,048

Cost of Old Equipment 66,000 Less Depreciation Year 1 (66,000*20%) 13,200 Depreciation Year 2 (66,000*32%) 21,120 Book Value of Old Equipment $31,680

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