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 Savings1 $67,000 2 57,000 3 55,000 4 53,000 5 50,000 6 39,000 YearTax Shield Benefits from DepreciationAftertax Cost SavingsTotal Annual Benefits17,43050,250$57,680216,21242,75058,96238,69241,25049,94245,45139,75045,20156,75637,50044,25663,40729,25032,657The firm’s tax rate is 25 percent and the cost of capital is 14 percent.j-2. Compute the present value of the total annual benefits. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)k-1. Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e). (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to the nearest whole dollar.) m edaConnes Production/bne/tinance/block_ 17e/Block17e AppB.pdrd- Student...EveryDollarSunrise ElementaryParentVUEOther BookmarksRe1/ 299%Open in AcrobatAppendix B Present value of $1, PVF1PV = FV(1+"]PercentPeriod1%2%3%4%5%6%7%8%9%10%11%12%0.9900.9800.9710.9620.9520.9430.9350.9260.9170.9090.9010.8930.9800.9610.9430.9250.9070.8900.8730.8570.8420.8260.8120.7970.9710.9420.9150.8890.8640.8400.8160.7940.7720.7510.7310.7120.9610.9240.8880.8550.8230.7920.7630.7350.7080.6830.6590.6360.9510.9060.8630.8220.7840.7470.7130.6810.6500.6210.5930.5670.9420.8880.8370.7900.7460.7050.6660.6300.5960.5640.5350.5070.9330.8710.8130.7600.7110.6650.6230.5830.5470.5130.4820.4520.9230.8530.7890.7310.6770.6270.5820.5400.5020.4670.4340.4049.0.9140.8370.7660.7030.6450.5920.5440.5000.4600.4240.3910.361100.9050.8200.7440.6760.6140.5580.5080.4630.4220.3860.3520.322110.8960.8040.7220.6500.5850.5270.4750.4290.3880.3500.3170.287120.8870.7880.7010.6250.5570.4970.4440.3970.3560.3190.2860.257130.8790.7730.6810.6010.5300.4690.4150.3680.3260.2900.2580.229140.8700.7580.6610.5770.5050.4420.3880.3400.2990.2630.2320.205150.8610.7430.6420.5550.4810.4170.3620.3150.2750.2390.2090.183160.8530.7280.6230.5340.4580.3940.3390.2920.2520.2180.1880.163170.8440.7140.6050.5130.4360.3710.3170.2700.2310.1980.1700.146180.8360.7000.5870.4940.4160.3500.2960.2500.2120.1800.1530.130190.8280.6860.5700.4750.3960.3310.2770.2320.1940.1640.1380.116200.8200.6730.5540.4560.3770.3120.2580.2150.1780.1490.1240.104250.7800.6100.4780.3750.2950.2330.1840.1460.1160.0740.059760300.7420.5520.4120.3080.2310.1740.1310.0990.0750.0570.0440.033400.6720.4530.3070.2080.1420.0970.0670.0460.0320.0220.0150.011500.6080.3720.2280.1410.0870.0540.0340.0210.0130.0090.0050.003etv A OMacBook AirO00O00F4IIF8F5F6F7F9F10 Ashford - Student...EveryDollarSunise ElementaryParentvoETable 12-11 Categories for depreclation write-offClassAll property with ADR midpolints of four years or less. Autos and lighttrucks are excluded from this category.3-year MACRSProperty with ADR midpoints of more than 4, but less than 10 years. Keyassets in this category include automobiles, light trucks, and techno-logical equipment such as computers and research-related propertles.Property with ADR midpoints of 10 years or more, but less than16 years. Most types of manufacturing equipment would fall intothis category, as would office furniture and fixtures.5-year MACRS7-year MACRS10-year MACRSProperty with ADR midpoints of 16 years or more, but less than20 years. Petroleum refining products, railroad tank cars, andmanufactured homes fall into this group.15-year MACRSProperty with ADR midpoints of 20 years or more, but less than25 years. Land improvement, pipeline distribution, telephonedistribution, and sewage treatment plants all belong in this category.Property with ADR midpoints of 25 years or more (with the exception ofreal estate, which is treated separately). Key investments in this cat-egory include electric and gas utility property and sewer pipes.20-year MACRSResidential rental property if 80% or more of the gross rental income isfrom nontransient dwelling units (e.g., an apartment building); low-income housing.27.5-yearMACRS31.5-yearNonresidential real property that has no ADR class life or whose classlife is 27.5 years or more.MACRS39-year MACRSNonresidential real property placed in service after May 12, 1993.tv AMacBook Air

Incremental benefits are those extra benefits which will be received for investing our amount in an…

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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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 cost of capital is 14 percent.

j-2. Compute the present value of the total annual benefits. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

k-1. Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e). (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to the nearest whole dollar.)

m edaConnes Production/bne/tinance/block_ 17e/Block17e AppB.pdr
d- Student...
EveryDollar
Sunrise Elementary
ParentVUE
Other Bookmarks
Re
1/ 2
99%
Open in Acrobat
Appendix B Present value of $1, PVF
1
PV = FV
(1+"]
Percent
Period
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
0.990
0.980
0.971
0.962
0.952
0.943
0.935
0.926
0.917
0.909
0.901
0.893
0.980
0.961
0.943
0.925
0.907
0.890
0.873
0.857
0.842
0.826
0.812
0.797
0.971
0.942
0.915
0.889
0.864
0.840
0.816
0.794
0.772
0.751
0.731
0.712
0.961
0.924
0.888
0.855
0.823
0.792
0.763
0.735
0.708
0.683
0.659
0.636
0.951
0.906
0.863
0.822
0.784
0.747
0.713
0.681
0.650
0.621
0.593
0.567
0.942
0.888
0.837
0.790
0.746
0.705
0.666
0.630
0.596
0.564
0.535
0.507
0.933
0.871
0.813
0.760
0.711
0.665
0.623
0.583
0.547
0.513
0.482
0.452
0.923
0.853
0.789
0.731
0.677
0.627
0.582
0.540
0.502
0.467
0.434
0.404
9.
0.914
0.837
0.766
0.703
0.645
0.592
0.544
0.500
0.460
0.424
0.391
0.361
10
0.905
0.820
0.744
0.676
0.614
0.558
0.508
0.463
0.422
0.386
0.352
0.322
11
0.896
0.804
0.722
0.650
0.585
0.527
0.475
0.429
0.388
0.350
0.317
0.287
12
0.887
0.788
0.701
0.625
0.557
0.497
0.444
0.397
0.356
0.319
0.286
0.257
13
0.879
0.773
0.681
0.601
0.530
0.469
0.415
0.368
0.326
0.290
0.258
0.229
14
0.870
0.758
0.661
0.577
0.505
0.442
0.388
0.340
0.299
0.263
0.232
0.205
15
0.861
0.743
0.642
0.555
0.481
0.417
0.362
0.315
0.275
0.239
0.209
0.183
16
0.853
0.728
0.623
0.534
0.458
0.394
0.339
0.292
0.252
0.218
0.188
0.163
17
0.844
0.714
0.605
0.513
0.436
0.371
0.317
0.270
0.231
0.198
0.170
0.146
18
0.836
0.700
0.587
0.494
0.416
0.350
0.296
0.250
0.212
0.180
0.153
0.130
19
0.828
0.686
0.570
0.475
0.396
0.331
0.277
0.232
0.194
0.164
0.138
0.116
20
0.820
0.673
0.554
0.456
0.377
0.312
0.258
0.215
0.178
0.149
0.124
0.104
25
0.780
0.610
0.478
0.375
0.295
0.233
0.184
0.146
0.116
0.074
0.059
760
30
0.742
0.552
0.412
0.308
0.231
0.174
0.131
0.099
0.075
0.057
0.044
0.033
40
0.672
0.453
0.307
0.208
0.142
0.097
0.067
0.046
0.032
0.022
0.015
0.011
50
0.608
0.372
0.228
0.141
0.087
0.054
0.034
0.021
0.013
0.009
0.005
0.003
etv A O
MacBook Air
O00
O00
F4
II
F8
F5
F6
F7
F9
F10

Ashford - Student...
EveryDollar
Sunise Elementary
ParentvoE
Table 12-11 Categories for depreclation write-off
Class
All property with ADR midpolints of four years or less. Autos and light
trucks are excluded from this category.
3-year MACRS
Property with ADR midpoints of more than 4, but less than 10 years. Key
assets in this category include automobiles, light trucks, and techno-
logical equipment such as computers and research-related propertles.
Property with ADR midpoints of 10 years or more, but less than
16 years. Most types of manufacturing equipment would fall into
this category, as would office furniture and fixtures.
5-year MACRS
7-year MACRS
10-year MACRS
Property with ADR midpoints of 16 years or more, but less than
20 years. Petroleum refining products, railroad tank cars, and
manufactured homes fall into this group.
15-year MACRS
Property with ADR midpoints of 20 years or more, but less than
25 years. Land improvement, pipeline distribution, telephone
distribution, and sewage treatment plants all belong in this category.
Property with ADR midpoints of 25 years or more (with the exception of
real estate, which is treated separately). Key investments in this cat-
egory include electric and gas utility property and sewer pipes.
20-year MACRS
Residential rental property if 80% or more of the gross rental income is
from nontransient dwelling units (e.g., an apartment building); low-
income housing.
27.5-year
MACRS
31.5-year
Nonresidential real property that has no ADR class life or whose class
life is 27.5 years or more.
MACRS
39-year MACRS
Nonresidential real property placed in service after May 12, 1993.
tv A
MacBook Air

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