60.1K

Verified Solution

Link Copied!

Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $58,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $24,800. A new piece of equipment will cost $148,000. 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 1212. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year		Cash Savings
1		$	62,000
2			54,000
3			52,000
4			50,000
5			47,000
6			36,000

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.) ?

f. Determine the depreciation schedule for the new equipment?

g. Determine the depreciation schedule for the remaining years of the old equipment?

h. Determine the incremental depreciation between the old and new equipment and the related tax shield benefits?

i. Compute the aftertax benefits of the cost savings.?

j-1. Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual benefits?

j-2. Compute the present value of the total annual benefits?

k-1. Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e)?

Answer & Explanation Solved by verified expert

See Answer