Hercules Exercise Equipment Company purchased a computerized measuring device two years ago for $$58,000.$ The equipment falls into the five$-$year category for MACRS depreciation and can currently be sold for $$24,800.$ A new piece of equipment will cost $$148,000.$ 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 $1212.$ Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year Cash Savings

$1$ $ $62,000$

$254,000$

$352,000$

$450,000$

$547,000$

$636,000$

The firm$$s tax rate is $25$ percent and the cost of capital is $12$ percent.

e$.$ What is the net cost of the new equipment? $($Include the inflow from the sale of the old equipment.$)$ f$.$ Determine the depreciation schedule for the new equipment. Year Depreciation Base Percentage Depreciation Annual Depreciation

$1$

$2$

$3$

$4$

$5$

$6$

$$0$ g$.$ Determine the depreciation schedule for the remaining years of the old equipment. Year Depreciation Base Percentage Depreciation Annual Depreciation

$1$

$2$

$3$

$4$ h$.$ Determine the incremental depreciation between the old and new equipment and the related tax shield benefits. Year Depreciation on New Equipment Depreciation on Old Equipment Incremental Depreciation Tax Rate Tax Shield Benefits

$1$

$2$

$3$

$4$

$5$

$6$ i$.$ Compute the aftertax benefits of the cost savings. Year Savings $(1$ Tax Rate$)$ Aftertax Savings

$1$ $$62,000$

$254,000$

$352,000$

$450,000$

$547,000$ j $1.$ Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual benefits. Year Tax Shield Benefits from Depreciation Aftertax Cost Savings Total Annual Benefits

$1$

$2$

$3$

$4$

$5$

$6$

k$-1.$ Compare the present value of the incremental benefits $($j$)$ to the net cost of the new equipment $($e$).$