4.00 polnts Hercules Exercise Equipment Co. purchased a computerized measuring d

Question

4.00 polnts 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. Use Table 12-12. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year Savings 1 $ 69,000 2 61,000 59,000 4 57,000 5 54,000 6 43,000 The fim's tax rate is 40 percent and the cost of capital is 12 percent.

Explanation / Answer

Part 1:

Year

(A) Cash savings

(B): Tax @40% (A X40%)

©: Net savings (A-B)

(D): Present value factor @12% pa

(E)Present value of net savings (CXD)

1

69000

27600

41400

0.892857

36964.29

2

61000

24400

36600

0.797194

29177.3

3

59000

23600

35400

0.71178

25197.02

4

57000

22800

34200

0.635518

21734.72

5

54000

21600

32400

0.567427

18384.63

6

43000

17200

25800

0.506631

13071.08

Present value of total annual benefits

144529

Part 2:

Present value of total annual benefits

144529

Cost of new equipment

200000

Less: Slave proceed of existing device

31800

Net cost of new equipment

168200

                   

Net present value of new equipment

Present value of total annual benefits

144529

Less: Net cost of new equipment

168200

Net present value

-23671

As can be seen that the net cost of new equipment is higher than the present value of total benefits that are expected accrue from the use of the new equipment thus, the investment in the new equipment is not a financially viable option.

Year

(A) Cash savings

(B): Tax @40% (A X40%)

©: Net savings (A-B)

(D): Present value factor @12% pa

(E)Present value of net savings (CXD)

1

69000

27600

41400

0.892857

36964.29

2

61000

24400

36600

0.797194

29177.3

3

59000

23600

35400

0.71178

25197.02

4

57000

22800

34200

0.635518

21734.72

5

54000

21600

32400

0.567427

18384.63

6

43000

17200

25800

0.506631

13071.08

Present value of total annual benefits

144529

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