Question

I have the answers for A through D. I just can't figure out the rest.

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $78,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $34,800. A new piece of equipment will cost $230,000. 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		Cash Savings
1		$	61,000
2			51,000
3			49,000
4			47,000
5			44,000
6			33,000

The firm’s tax rate is 40 percent and the cost of capital is 10 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?
  

	No
	Yes

Answer 1

Answer a					Answer f
Book value of old equipment					The depreciation schedule for the new equipment using 5 year MACRS
Cost of old equipment	$78,000.00				Year	Depreciable value	Depreciation rates	Depreciation
Less : Depreciation for 1st Year [20% OF $78000]	$15,600.00				1	$230,000	20%	$46,000
Less : Depreciation for 2nd Year [32% OF $78000]	$24,960.00				2	$230,000	32%	$73,600
Book value of old equipment	$37,440.00				3	$230,000	19.20%	$44,160
					4	$230,000	11.52%	$26,496
Answer b					5	$230,000	11.52%	$26,496
Calculation of tax loss on sale of old equipment					6	$230,000	5.76%	$13,248
Sale of old equipment	$34,800.00
Less : Book value of old equipment	$37,440.00				Answer g
Loss on Sale	-$2,640.00				The depreciation schedule for the remaining years of the old equipment.
Tax loss on the sale of the old equipment = $0 as there is loss on sale.					Year	Depreciable value	Depreciation rates	Depreciation
					1	$78,000	19.20%	$14,976
Answer c					2	$78,000	11.52%	$8,986
The tax benefit from the sale = 40% of Loss on sale = 40% x $2640 = $1056					3	$78,000	11.52%	$8,986
					4	$78,000	5.76%	$4,493
Answer d
The cash inflow from the sale of the old equipment					Answer h
Sale value of old equipment	$34,800.00				Determine the incremental depreciation between the old and new equipment
Add : tax benefit from sale	$1,056.00				and the related tax shield benefits.
The cash inflow from the sale of the old equipment	$35,856.00				Year	Depreciation (New equipment)	Depreciation (Old equipment)	Difference	Tax shield @ 40% of difference
					1	$46,000	$14,976	$31,024	$12,410
Answer e					2	$73,600	$8,986	$64,614	$25,846
The net cost of the new equipment					3	$44,160	$8,986	$35,174	$14,070
Cost of new equipment	$230,000.00				4	$26,496	$4,493	$22,003	$8,801
Less : cash inflow from sale of old equipment	$35,856.00				5	$26,496		$26,496	$10,598
The net cost of the new equipment	$194,144.00				6	$13,248		$13,248	$5,299
Answer k-1 Compare the present value of the incremental benefits (j)					Answer i
to the net cost of the new equipment (e).					The aftertax benefits of the cost savings
Present value of annual benefits	$186,276.36				Year	Cash savings	Tax @ 40% of cash savings	After tax benefits from cost savings
Less : Net cost of new equipment	$194,144.00				1	$61,000	$24,400	$36,600
Net Present Value	-$7,867.64				2	$51,000	$20,400	$30,600
					3	$49,000	$19,600	$29,400
Answer k-2					4	$47,000	$18,800	$28,200
The answer is No.					5	$44,000	$17,600	$26,400
The replacement of equipment should not be undertaken as the					6	$33,000	$13,200	$19,800
net present value of new equipment is nagative amount.
					Answer j-1 Determine the total annual benefits.
					Year	After tax benefits from cost savings	Depreciation Tax shield	Total Annual benefits
					1	$36,600	$12,410	$49,010
					2	$30,600	$25,846	$56,446
					3	$29,400	$14,070	$43,470
					4	$28,200	$8,801	$37,001
					5	$26,400	$10,598	$36,998
					6	$19,800	$5,299	$25,099
					Answer j-2 Compute the present value of the total annual benefits.
					Year	Total Annual benefits	Discount factor @ 10%	Present value of total annual benefits
					1	$49,010	0.909090909	$44,554
					2	$56,446	0.826446281	$46,649
					3	$43,470	0.751314801	$32,659
					4	$37,001	0.683013455	$25,272
					5	$36,998	0.620921323	$22,973
					6	$25,099	0.56447393	$14,168
					Total			$186,276