Reference no: EM133146461
Question - Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $86,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $38,800. A new piece of equipment will cost $215,000. 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 (Links to an external site.). Use Appendix B (Links to an external site.) for an approximate answer but calculate your final answer using the formula and financial calculator methods.
|
Year
|
Cash Savings
|
|
1
|
$65,000
|
|
2
|
55,000
|
|
3
|
53,000
|
|
4
|
51,000
|
|
5
|
48,000
|
|
6
|
37,000
|
The firm's tax rate is 25 percent and the cost of capital is 11 percent.
Using this information, answer the following questions:
1. What is the book value of the old equipment?
2. What is the tax loss on the sale of the old equipment?
3. What is the tax benefit from the sale?
4. What is the cash inflow from the sale of the old equipment?
5. What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.)
6. Determine the depreciation schedule for the new equipment.
7. Determine the depreciation schedule for the remaining years of the old equipment.
8. Determine the incremental depreciation between the old and new equipment and the related tax shield benefits.
9. Compute the after-tax benefits of the cost savings.
10. Add the depreciation tax shield benefits and the after tax cost savings to determine the total annual benefits.
11. Compute the present value of the total annual benefits.
12. Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e). Should the replacement be undertaken?