Pinnacle Custom Home Builders purchased a 40 foot articulating boom lift three years ago for $55,000....

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Pinnacle Custom Home Builders purchased a 40 foot articulatingboom lift three years ago for $55,000. The equipment has beendepreciated under the 5-year MACRS schedule (20%, 32%, 19%, 12%,12% & 5%). The old equipment can be sold for $35,000.
Pinnacle is considering the purchase of a new 60 footarticulating boom lift that would allow the company to completenearly all of its construction projects without the need for costlyrental lifts. The new lift could be purchased for $127,000 andwould also fall under the 5-year MACRS depreciation schedule.
Assume the old and new equipment would provide the followingoperating gains (or losses) over the next six years.
New Equipment
Old Equipment
1.............
$40,000
$25,000
2.............
38,000
16,000
3.............
35,000
9,000
4.............
30,000
8,000
5.............
25,000
6,000
6.............
22,500
5,000
The firm has a 30 percent tax rate and a 7 percent cost ofcapital. Should the new equipment be purchased to replace the oldequipment? Briefly justify your answer.
All interim calculations (including TVM) must be made using thebuilt-in Excel functions and your submission should be in good form(i.e., neat and easy to follow with descriptive labels, etc.).

Answer & Explanation Solved by verified expert

3.8 Ratings (482 Votes)

Step 1 Calculate Annual Depreciation on Old Equipment Upto 3 Years The annual depreciation on old equipment upto 3 years is determined as below Year Cost of Old Equipment 1 MACRS Depreciation Rate 2 Annual Depreciation 12 1 55000 20 11000 2 55000 32 17600 3 55000 19 10450 Total Depreciation 39050 Step 2 Calculate Book Value of Old Equipment After 3 Years and GainLoss on Sale of Old Equipment The book value and gainloss on sale of old equipment is arrived as below Book Value of Old Equipment After 3 Years Cost of Old Equipment Total Depreciation on Old Equipment Upto 3 Years 55000 39050 15950 Gain on Sale of Old Equipment Sale Price of Old Equipment Book Value of Old Equipment After See Answer

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Pinnacle Custom Home Builders purchased a 40 foot articulatingboom lift three years ago for $55,000. The equipment has beendepreciated under the 5-year MACRS schedule (20%, 32%, 19%, 12%,12% & 5%). The old equipment can be sold for $35,000.Pinnacle is considering the purchase of a new 60 footarticulating boom lift that would allow the company to completenearly all of its construction projects without the need for costlyrental lifts. The new lift could be purchased for $127,000 andwould also fall under the 5-year MACRS depreciation schedule.Assume the old and new equipment would provide the followingoperating gains (or losses) over the next six years.New EquipmentOld Equipment1.............$40,000$25,0002.............38,00016,0003.............35,0009,0004.............30,0008,0005.............25,0006,0006.............22,5005,000The firm has a 30 percent tax rate and a 7 percent cost ofcapital. Should the new equipment be purchased to replace the oldequipment? Briefly justify your answer.All interim calculations (including TVM) must be made using thebuilt-in Excel functions and your submission should be in good form(i.e., neat and easy to follow with descriptive labels, etc.).

	New Equipment	Old Equipment
1.............	$40,000	$25,000
2.............	38,000	16,000
3.............	35,000	9,000
4.............	30,000	8,000
5.............	25,000	6,000
6.............	22,500	5,000