Hercules Exercise Equipment Co. purchased a computerized measuring device two ye
ID: 2743191 • Letter: H
Question
Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $62,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $26,800.
A new piece of equipment will cost $152,000. 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.)
No
Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $62,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $26,800.
A new piece of equipment will cost $152,000. 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
MACRS Depreciation Schedule for old Machine:
5 Years Depreciation Schedule
Year
Basis
%
Depreciation Expense
Accumulated Depreciation
Ending Book Value
1
$62,000.00
20.000%
$12,400.00
$12,400.00
$49,600.00
2
$62,000.00
32.000%
$19,840.00
$32,240.00
$29,760.00
3
$62,000.00
19.200%
$11,904.00
$44,144.00
$17,856.00
4
$62,000.00
11.520%
$7,142.40
$51,286.40
$10,713.60
5
$62,000.00
11.520%
$7,142.40
$58,428.80
$3,571.20
6
$62,000.00
5.760%
$3,571.20
$62,000.00
$0.00
So, current book Value of old machine is $29,760.00.
Tax loss on old machine, if sold = ($29,760 - $26,800) x 0.30 = $888.00
Cash inflow from the sale of old equipment will be equal to selling price, i.e. $26,800.00 since there will be no taxes due to book value of equipment being higher.
Net Cost of new equipment = $152,000 - $26,800 = $125,200
Depreciation schedule for new equipment:
5 Years Depreciation Schedule
Year
Basis
%
Depreciation Expense
Accumulated Depreciation
Ending Book Value
1
$152,000.00
20.000%
$30,400.00
$30,400.00
$121,600.00
2
$152,000.00
32.000%
$48,640.00
$79,040.00
$72,960.00
3
$152,000.00
19.200%
$29,184.00
$108,224.00
$43,776.00
4
$152,000.00
11.520%
$17,510.40
$125,734.40
$26,265.60
5
$152,000.00
11.520%
$17,510.40
$143,244.80
$8,755.20
6
$152,000.00
5.760%
$8,755.20
$152,000.00
$0.00
Please refer to first schedule on the top of the answer.
Year
Depreciation on New Equipment
Depreciation on Old Equipment
Incremental Depreciation
Tax Rate
Tax Shield Benefit
1
$30,400.00
$11,904.00
$18,496.00
30%
$5,548.80
2
$48,640.00
$7,142.40
$41,497.60
30%
$12,449.28
3
$29,184.00
$7,142.40
$22,041.60
30%
$6,612.48
4
$17,510.40
$3,571.20
$13,939.20
30%
$4,181.76
5
$17,510.40
$0.00
$17,510.40
30%
$5,253.12
6
$8,755.20
$0.00
$8,755.20
30%
$2,626.56
Year
Savings
1-Tax Rate
After-tax Savings [(Savings) x (1-tax rate)]
1
$64,000.00
0.7
$44,800.00
2
$56,000.00
0.7
$39,200.00
3
$54,000.00
0.7
$37,800.00
4
$52,000.00
0.7
$36,400.00
5
$49,000.00
0.7
$34,300.00
6
$38,000.00
0.7
$26,600.00
Year
Tax Shield Benefit
After-tax Cost Savings
Total Annual Benefits
1
$5,548.80
$44,800.00
$50,348.80
2
$12,449.28
$39,200.00
$51,649.28
3
$6,612.48
$37,800.00
$44,412.48
4
$4,181.76
$36,400.00
$40,581.76
5
$5,253.12
$34,300.00
$39,553.12
6
$2,626.56
$26,600.00
$29,226.56
Present Value of Annual Benefits:
{$50,348.80/(1+.14)1} + {$51,649.28/(1+.14)2} + {$44,412.48/(1+.14)3} + {$40,581.76/(1+.14)4} + {$39,553.12/(1+.14)5} + {$29,226.56/(1+.14)6} = $171,770.76
NPV = PV of Annual Benefits – Net Cost of new equipment
=> $171,770.76 - $125,200 = $46,570.76
The replacement should be undertaken as it results in positive NPV.
5 Years Depreciation Schedule
Year
Basis
%
Depreciation Expense
Accumulated Depreciation
Ending Book Value
1
$62,000.00
20.000%
$12,400.00
$12,400.00
$49,600.00
2
$62,000.00
32.000%
$19,840.00
$32,240.00
$29,760.00
3
$62,000.00
19.200%
$11,904.00
$44,144.00
$17,856.00
4
$62,000.00
11.520%
$7,142.40
$51,286.40
$10,713.60
5
$62,000.00
11.520%
$7,142.40
$58,428.80
$3,571.20
6
$62,000.00
5.760%
$3,571.20
$62,000.00
$0.00
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