FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Hercules Exercise Equipment Company purchased a computerized measuring device two years ago for $94,000. The equipment falls
into the five-year category for MACRS depreciation and can currently be sold for $42,800. A new piece of equipment will cost
$255,000. 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
$ 69,000
2
59,000
3
57,000
4
55,000
5
6
52,000
41,000
The firm's tax rate is 25 percent and the cost of capital is 10 percent.
a. What is the book value of the old equipment?
Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.
Book value
b. What is the tax loss on the sale of the old equipment?
Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.
Tax loss
c. What is the tax benefit from the sale?
Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.
Tax benefit
d. What is the cash inflow from the sale of the old equipment?
Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.
Cash inflow
e. What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.)
Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.
Net cost
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Transcribed Image Text:Hercules Exercise Equipment Company purchased a computerized measuring device two years ago for $94,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $42,800. A new piece of equipment will cost $255,000. 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 $ 69,000 2 59,000 3 57,000 4 55,000 5 6 52,000 41,000 The firm's tax rate is 25 percent and the cost of capital is 10 percent. a. What is the book value of the old equipment? Note: Do not round intermediate calculations and round your answer to the nearest whole dollar. Book value b. What is the tax loss on the sale of the old equipment? Note: Do not round intermediate calculations and round your answer to the nearest whole dollar. Tax loss c. What is the tax benefit from the sale? Note: Do not round intermediate calculations and round your answer to the nearest whole dollar. Tax benefit d. What is the cash inflow from the sale of the old equipment? Note: Do not round intermediate calculations and round your answer to the nearest whole dollar. Cash inflow e. What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.) Note: Do not round intermediate calculations and round your answer to the nearest whole dollar. Net cost
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