Problem 12-33 Replacement decision analysis (LO12-4] newHercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $78,000. The equipment falls intothe five-year category for MACRS depreciation and can currently be sold for $34,800. A new piece of equipment will cost $230,000. Italso falls into the five-year category for MACRS depreciation. Assume the new equipment would provide the following stream of addedcost savings for the next six years. Use Table 12–12. Use Appendix B for an approximate answer but calculate your final answer usingthe formula and financial calculator methods.CashYearSavings$ 61,000151,000349,00047,00044,00033,0004The firm's tax rate is 25 percent and the cost of capital is 10 percent. g. Determine the depreciation schedule for the remaining years of the old equipment. (Round the depreciation base and annualdepreciation answers to the nearest whole dollar. Round the percentage depreciation factors to 3 decimal places.)Year DepreciationBasePercentageDepreciationAnnualDepreciation1234h. Determine the incremental depreciation between the old and new equipment and the related tax shield benefits. (Enter the tax rateas a decimal rounded to 2 decimal places. Round all other answers to the nearest whole dollar.)Depreciationon NewEquipmentDepreciationon OldEquipmentIncrementalTax ShieldBenefitsYearTax RateDepreciation346

Given: Old equipment cost =$78,000 New equipment cost = $230,000 Tax rate = 25%

Answered: Hercules Exercise Equipment Co.…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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QUESTION 4 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $125. The production cost of each heater is $110. The fixed cost of production is $45000. You are expecting to sell 10500 units per year. This project has an economic life of 9 years. The project requires an investment of $555000 in plants and equipment. This equipment will be depreciated using a straight line depreciation method to a salvage value of zero. The required rate of return for the project is 8 percent. The marginal corporate tax rate is 21 percent. Based on these assumptions, calculate the degree of operating leverage (DOL)? 3.4 O 3.1 O 3.2 3.3
QUESTION 4 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9000 units per year. This project has an economic life of 6 years. The project requires an investment of $700000 in plants and equipment. This equipment will be depreciated to zero salvage value based on 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20 % , 32 %, 19.2 %, 11.52 %, 11.52 %, and 5.76 percent, respectively. The required rate of return for the project is 12 percent, the working capital requirement is 10 percent of the next year's sales revenue. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The marginal corporate tax rate is 20 percent. At the termination of the project, the plant and equipment will be sold for an estimated value of $50000. Based on these assumptions, estimate the total cash flows for the project.…
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Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $90,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for $40,800. A new piece of equipment will cost $235,000. 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 $ 67,000 2 57,000 3 55,000 4 53,000 5 50,000 6 39,000 Year Tax Shield Benefits from Depreciation Aftertax Cost Savings Total Annual Benefits 1 7,430 50,250 $57,680 2 16,212 42,750 58,962 3 8,692 41,250 49,942 4 5,451 39,750 45,201 5 6,756 37,500 44,256 6 3,407 29,250 32,657 The firm’s tax rate is 25 percent and the…
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8
QUESTION 3 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9000 units per year. This project has an economic life of 6 years. The project requires an investment of $700000 in plants and equipment. This equipment will be depreciated to zero salvage value based on 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20 % ,32 %, 19.2 %, 11.52 %, 11.52 %, and 5.76 percent, respectively. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The required rate of return for the project is 12 percent, the working capital requirement is 10 percent of the next year's sales revenue. The marginal corporate tax rate is 20 percent. At the termination of the project, the plant and equipment will be sold for an estimated value of $50000. Based on these assumptions, estimate the cash flow for capital expenditures.…

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