Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $50,000. The equipment falls into the…

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $50,000. The equipment falls into the…

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Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $50,000. The equipment falls into
the five-year category for MACRS depreciation and can currently be sold for $20,800. A new piece of equipment will cost $140,000. 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.
Year
123456
Cash
Savings
$58,000
50,000
48,000
46,000
43,000
32,000
The firm’s tax rate is 25 percent and the cost of capital is 8 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 The firm’s tax rate is 25 percent and the cost of capital is 8 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.)
Year
Depreciation
Base
Percentage
Depreciation
Annual
Depreciation 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.)
Year
1
2
3
4
56
Depreciation
Base
Percentage
Annual
Depreciation Depreciation
$
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.)
Year
1
2
3
4
Depreciation Percentage
Base
Depreciation
Annual
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.)
Year
1
2
3
4
LO
5
O)
6
Depreciation
on New
Equipment
Depreciation
on Old
Equipment
Incremental
Depreciation
Tax Rate
Tax Shield
Benefits i. 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.)
Year
1
2
3
4
5
CO
6
Savings
$ 58,000
50,000
48,000
46,000
43,000
32,000
(1 – Tax Rate)
Aftertax Savings j-1. 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.)
Year
1
2
3
4
LO
5
6
O)
Tax Shield
Benefits from
Depreciation
Aftertax Cost
Savings
Total Annual
Benefits j-2. Compute the present value of the total annual benefits. (Do not round intermediate calculations and round your answer to the
nearest whole dollar.)
Present value
k-1. 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.)
Net present value
k-2. Should the replacement be undertaken?
Yes
No Table 12-12 Depreciation percentages (expressed in decimals)
Depreciation 3-Year 5-Year
Year
MACRS
MACRS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
*******
************
************
*******
*******
*******
******
*******
************
*******
************
0.333
0.445
0.148
0.074
1.000
0.200
0.320
0.192
0.115
0.115
0.058
1.000
7-Year 10-Year 15-Year
MACRS MACRS MACRS
0.143
0.245
0.175
0.125
0.089
0.089
0.089
0.045
1.000
0.100
0.180
0.144
0.115
0.092
0.074
0.066
0.066
0.065
0.065
0.033
1.000
0.050
0.095
0.086
0.077
0.069
0.062
0.059
0.059
0.059
0.059
0.059
0.059
0.059
0.059
0.059
0.030
1.000
20-Year
MACRS
0.038
0.072
0.067
0.062
0.057
0.053
0.045
0.045
0.045
0.045
0.045
0.045
0.045
0.045
0.045
0.045
0.045
0.045
0.045
0.045
0.017
1.000 Period
1
W N
3
4
LO
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
25
30
40
50
1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
0.780
0.742
0.672
0.608
2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
0.610
0.552
0.453
0.372
3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
0.478
0.412
0.307
0.228
4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
0.375
0.308
0.208
0.141
5%
0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645
0.614
0.585
0.557
0.530
0.505
0.481
0.458
0.436
0.416
0.396
0.377
0.295
0.231
0.142
0.087
Percent
6%
0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.394
0.371
0.350
0.331
0.312
0.233
0.174
0.097
0.054
7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
0.184
0.131
0.067
0.034
8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
0.146
0.099
0.046
0.021
9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
0.116
0.075
0.032
0.013
10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
0.092
0.057
0.022
0.009
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
0.074
0.044
0.015
0.005
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
0.059
0.033
0.011
0.003

Expert Answer:

Answer rating: 100% (QA)

To determine the book value of the old equipment we need to calculate the accumulated depreciation T
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