Homework SourseHercules Exercise Equipment Co purchased a computerized meas
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.
The firm’s tax rate is 30 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.)
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.)
c. What is the tax benefit from the sale? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)
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.)
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.)
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.)
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.)
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.)
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.)
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.)
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.)
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.)
k-2. Should the replacement be undertaken?
| Year | Cash Savings | |||
| 1 | $ | 58,000 | ||
| 2 | 50,000 | |||
| 3 | 48,000 | |||
| 4 | 46,000 | |||
| 5 | 43,000 | |||
| 6 | 32,000 | |||
Solution
Purchase price $50,000 A B=50000*A C D=50000-C Year MACRS-5 year Recovery rate Depreciation Amount Accumulated depreciation Book Value at end of year 1 20% $ 10,000 $ 10,000 $ 40,000 2 32% $ 16,000 $ 26,000 $ 24,000 3 19.20% $ 9,600 $ 35,600 $ 14,400 4 11.52% $ 5,760 $ 41,360 $ 8,640 5 11.52% $ 5,760 $ 47,120 $ 2,880 6 5.76% $ 2,880 $ 50,000 $ - a) Book value of the old equipment $ 24,000 b) Sales price $20,800 Loss on sale of equipment $ 3,200 c) Tax benefit on sale $ 960 (3200*0.3) d) Cash Inflow from sale of old equipment $21,760 (20800+960) e) Cost of new equipment $140,000 Cash Inflow from sale of old equipment $21,760 Net cost of the new equipment $118,240 (140000-21760) f Depreciation schedule of the new equipment A B=140000*A C D=140000-C Year MACRS-5 year Recovery rate Depreciation Amount Accumulated depreciation Book Value at end of year 1 20% $ 28,000 $ 28,000 $ 112,000 2 32% $ 44,800 $ 72,800 $ 67,200 3 19.20% $ 26,880 $ 99,680 $ 40,320 4 11.52% $ 16,128 $ 115,808 $ 24,192 5 11.52% $ 16,128 $ 131,936 $ 8,064 6 5.76% $ 8,064 $ 140,000 $ - g Depreciation schedule for remaining years of old equipment A B=50000*A Year MACRS-5 year Recovery rate Depreciation Amount 1 19.20% $ 9,600 2 11.52% $ 5,760 3 11.52% $ 5,760 4 5.76% $ 2,880 h Incremental depreciation and related tax shield A B=140000*A C D=B-C E=D*0.3 Year MACRS-5 year Recovery rate Depreciation Amount(new equipment) Depreciation Amount old Equipment Incremental Depreciation Depreciation tax shield 1 20% $ 28,000 $ 9,600 $ 18,400 $ 5,520 2 32% $ 44,800 $ 5,760 $ 39,040 $ 11,712 3 19.20% $ 26,880 $ 5,760 $ 21,120 $ 6,336 4 11.52% $ 16,128 $ 2,880 $ 13,248 $ 3,974 5 11.52% $ 16,128 $0 $ 16,128 $ 4,838 6 5.76% $ 8,064 $0 $ 8,064 $ 2,419 i)&j1 After tax benefits of cost savings: A B=A*(1-0.3) Year Before tax Cost savings After tax benefits of Cash savings Depreciation tax shield Total annual Benefit 1 58,000 $ 40,600 $ 5,520 $ 46,120 2 50,000 $ 35,000 $ 11,712 $ 46,712 3 48,000 $ 33,600 $ 6,336 $ 39,936 4 46,000 $ 32,200 $ 3,974 $ 36,174 5 43,000 $ 30,100 $ 4,838 $ 34,938 6 32,000 $ 22,400 $ 2,419 $ 24,819 j2 Present Value (PV) of Cash Flow: (Cash Flow)/((1+i)^N) i=Discount Rate=cost of capital=8%=0.08 N=Year of Cash Flow N A PV=A/(1.08^N) Year Total annual Benefit Present Value of annual Benefit 1 $ 46,120.0 42703.7037 2 $ 46,712.0 40048.01097 3 $ 39,936.0 31702.48438 4 $ 36,174.4 26589.26391 5 $ 34,938.4 23778.48797 6 $ 24,819.2 15640.306 SUM 180462.2569 Present Value of the total benefits $ 180,462 k1 Net cost of the new equipment $118,240 Net Present Value $ 62,222 (180462-118240) k2 Should the replacement be undertaken? YES Because , the Net Present Value(NPV) is positive The replacement will create value for shareholders
