Question
In: Finance
Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $72,000. The equipment...
Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $72,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $31,800.
A new piece of equipment will cost $200,000. 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.
Year Cash Savings
1 $69,000
2 61,000
3 59,000
4 57,000
5 54,000
6 43,000
The firms tax rate is 25 percent and the cost of capital is 12 percent.
e.What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.) (do not round intermediate calculations and round answer to the nearest whole dollar)
Net cost$
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 DepreciationBase PercentageDepreciation AnnualDepreciation
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 DepreciationBase PercentageDepreciation AnnualDepreciation
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 Depre onNewEquip Depre onoldEquip IncrementalDepre TaxRate TaxShieldBenefits
1
2
3
4
5
6
i.Compute the aftertax benefits of the cost savings. (enter the tax rate as a decimal rounded to 2 decimal places. round all other answers to the nearest whole dollar)
Year. Savings. (1 - Tax Rate) Aftertax Savings
1 $69,000
2 61,000
3 59,000
4 57,000
5 54,000
6 43,000
j-1.Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual benefits. (Do not round intermediate calculations and round your answer to the nearest whole dollar)
Year TaxShieldBenefits fromDepreciation AftertaxCostSavings Total Annual Benefits
1
2
3
4
5
6
j-2.Compute the present value of the total annual benefits. (Do not round intermediate calculations and round your answer to the nearest whole dollar)
Total annual benefits$
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 dollar)
Net present value$
Solutions
Expert Solution
| Solution e | Old equipment | |||||
| Cost | $ 72,000 | |||||
| Dep-year 1 | $ 14,400 | 72000*20% | ||||
| Dep-year 1 | $ 23,040 | 72000*32% | ||||
| WDV | $ 34,560 | |||||
| Sale price | $ 31,800 | |||||
| Loss | $ 2,760 | |||||
| Tax benefit | $ 690 | 2760*25% | ||||
| Sale price after tax | $ 32,490 | 31800+690 | ||||
| Cost of new equipment | $ 200,000 | |||||
| Less sale proceed of old equipment | $ (32,490) | |||||
| Net investment | $ 167,510 | |||||
| Solution f | ||||||
| Year | Cost | Dep rate | Depreciation | Depreciation | ||
| 1 | $ 200,000 | 20.00% | =200000*20% | $ 40,000 | ||
| 2 | $ 200,000 | 32.00% | =200000*32% | $ 64,000 | ||
| 3 | $ 200,000 | 19.20% | =200000*19.2% | $ 38,400 | ||
| 4 | $ 200,000 | 11.52% | =200000*11.52% | $ 23,040 | ||
| 5 | $ 200,000 | 11.52% | =200000*11.52% | $ 23,040 | ||
| 6 | $ 200,000 | 5.76% | =200000*5.76% | $ 11,520 | ||
| Solution g | ||||||
| Year | Cost | Dep rate | Depreciation | Depreciation | ||
| 1 | $ 72,000 | 19.20% | =72000*19.2% | $ 13,824 | ||
| 2 | $ 72,000 | 11.52% | =72000*11.52% | $ 8,294 | ||
| 3 | $ 72,000 | 11.52% | =72000*11.52% | $ 8,294 | ||
| 4 | $ 72,000 | 5.76% | =72000*5.76% | $ 4,147 | ||
| Solution h | Incremental depreciation | |||||
| Year | New Depreciation | Old Depreciation | Additional depreciation | |||
| 1 | $ 40,000 | $ 13,824 | $ 26,176 | |||
| 2 | $ 64,000 | $ 8,294 | $ 55,706 | |||
| 3 | $ 38,400 | $ 8,294 | $ 30,106 | |||
| 4 | $ 23,040 | $ 4,147 | $ 18,893 | |||
| 5 | $ 23,040 | $ 23,040 | ||||
| 6 | $ 11,520 | $ 11,520 | ||||
| Solution i | ||||||
| Year | Cost saving | Dep rate | After tax saving | |||
| 1 | $ 69,000 | =69000*(1-25%) | $ 51,750 | |||
| 2 | $ 61,000 | =61000*(1-25%) | $ 45,750 | |||
| 3 | $ 59,000 | =59000*(1-25%) | $ 44,250 | |||
| 4 | $ 57,000 | =57000*(1-25%) | $ 42,750 | |||
| 5 | $ 54,000 | =54000*(1-25%) | $ 40,500 | |||
| 6 | $ 43,000 | =43000*(1-25%) | $ 32,250 | |||
| Total | $ 257,250 | |||||
| Solution j | ||||||
| Year | Aditional depreciation | Tax shield | Tax shield | |||
| 1 | $ 26,176 | =26176*(25%) | $ 6,544 | |||
| 2 | $ 55,706 | =55705.6*(25%) | $ 13,926 | |||
| 3 | $ 30,106 | =30105.6*(25%) | $ 7,526 | |||
| 4 | $ 18,893 | =18892.8*(25%) | $ 4,723 | |||
| 5 | $ 23,040 | =23040*(25%) | $ 5,760 | |||
| 6 | $ 11,520 | =11520*(25%) | $ 2,880 | |||
jeff jeffy answered 1 year ago