Question

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $56,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $23,800. A new piece of equipment will cost $146,000. 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			53,000
3			51,000
4			49,000
5			46,000
6			35,000

The firm’s tax rate is 25 percent and the cost of capital is 11 percent.

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.)

year	depreciation base	percentage depreciation	annual depreciation
1	?	?	?
2	?	?	?
3	?	?	?
4	?	?	?
5	?	?	?
6	?	?	?
			?

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	depreciation base	percentage depreciation	annual depreciation
1	?	?	?
2	?	?	?
3	?	?	?
4	?	?	?

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	depreciation on new equipment	depreciation on old equipment	incremental depreciation	tax rate	tax shield benefits
1	?	?	?	?	?
2	?	?	?	?	?
3	?	?	?	?	?
4	?	?	?	?	?
5	?	?	?	?	?
6	?	?	?	?	?

Answer 1