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29. The
Spartan Technology Company has a proposed contract with the Digital Systems
Company of Michigan.
The initial investment in land and equipment will be $120,000. Of this amount,
$70,000 is subject to five-year MACRS depreciation. The balance is in
nondepreciable property. The contract covers six years; at the end of six
years, the nondepreciable assets will be sold for $50,000, which is their
original cost. The depreciated assets will have zero resale value.
The contract will require an additional investment of $55,000 in
working capital at the beginning of the first year and, of this amount, $25,000
will be returned to the Spartan Technology Company after six years.
The investment will produce $50,000 in
income before depreciation and taxes for each of the six years. The corporation
is in a 40 percent tax bracket and has a 10 percent cost of capital.
Should the investment be undertaken? Use the net present value
method.
30. An asset was purchased three years ago for
$140,000. It falls into the five-year category for MACRS depreciation. The firm
is in a 35 percent tax bracket. Compute the:
a. Tax loss on the sale and the related tax
benefit if the asset is sold now for $15,320.
b. Gain
and related tax on the sale if the asset is sold now for $58,820. (Refer to
footnote 3.)
31. Polycom Technology is considering the
purchase of a new piece of equipment for
$110,000. It has a nine-year midpoint of its asset depreciation range (ADR). It
will require an additional initial investment of $60,000 in nondepreciable
working capital. Fifteen thousand dollars of this investment will be recovered
after the sixth year and will provide additional cash flow for that year.
Income before depreciation and taxes for the next
six years will be:

Year Amount

1………………… $85,000
2………………… 75,000
3………………… 60,000
4………………… 52,500
5………………… 45,000
6………………… 40,000

The
tax rate is 30 percent. The cost of capital must be computed based on
the following (round the final value to
the nearest whole number):

Cost (aftertax)

Weights

Debt…………………………………………………..

Kd

7.0%

40%

Preferred stock…………………………………….

Kp

10.0

10

Common equity (retained earnings)………..

Ke

16.0

50

a. Determine the annual depreciation
schedule.
b. Determine annual cash flow. Include
recovered working capital in the sixth year.
c. Determine the weighted average cost of
capital.
d. Determine the net present value. Should
Polycom Technology purchase the new equipment?
32. Graphic Systems purchased a computerized
measuring device two years ago for $80,000. It falls into the five-year
category for MACRS depreciation. The equipment can currently be sold for
$28,400.
A new piece of equipment will cost $210,000. 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.

Year

Cash Flow

1…………….

$76,000

2…………….

66,000

3…………….

62,000

4…………….

60,000

5…………….

56,000

6…………….

42,000

The
tax rate is 34 percent and the cost of capital is 12 percent.
a. What is the book value of the old
equipment?
b. What is the tax loss on the sale of the
old equipment?
c. What is the tax benefit from the sale?
d. What is the cash inflow from the sale of
the old equipment?
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.
g. Determine the depreciation schedule for
the remaining years of the old equipment.
h. Determine the incremental depreciation between
the old and new equipment and the related tax shield benefits.
i. Compute the aftertax benefits of the cost
savings.
j. Add the depreciation tax shield benefits
and the aftertax cost savings, and determine the present value. (See Table
12-17 as an example.)
k. Compare the present value of the
incremental benefits (j) to the net
cost of the new equipment (e). Should
the replacement be undertaken?

COMPREHENSIVE PROBLEM
The Woodruff Corporation purchased a piece
of equipment three years ago for $230,000. It has an asset depreciation range
(ADR) midpoint of eight years. The old equipment can be sold for $90,000.
A
new piece of equipment can be purchased for $320,000. It also has an ADR of
eight years.
Assume the old and new equipment would provide the following
operating gains (or losses) over the next six years.

New Equipment

Old Equipment

1………….

$80,000

$25,000

2………….

76,000

16,000

3………….

70,000

9,000

4………….

60,000

8,000

5………….

50,000

6,000

6………….

45,000

(7,000)

The
firm has a 36 percent tax rate and a 9 percent cost of capital. Should the new
equipment be purchased to replace the old equipment?29. The
Spartan Technology Company has a proposed contract with the Digital Systems
Company of Michigan.
The initial investment in land and equipment will be $120,000. Of this amount,
$70,000 is subject to five-year MACRS depreciation. The balance is in
nondepreciable property. The contract covers six years; at the end of six
years, the nondepreciable assets will be sold for $50,000, which is their
original cost. The depreciated assets will have zero resale value.The contract will require an additional investment of $55,000 in
working capital at the beginning of the first year and, of this amount, $25,000
will be returned to the Spartan Technology Company after six years.The investment will produce $50,000 in
income before depreciation and taxes for each of the six years. The corporation
is in a 40 percent tax bracket and has a 10 percent cost of capital.Should the investment be undertaken? Use the net present value
method.30. An asset was purchased three years ago for
$140,000. It falls into the five-year category for MACRS depreciation. The firm
is in a 35 percent tax bracket. Compute the: a. Tax loss on the sale and the related tax
benefit if the asset is sold now for $15,320. b. Gain
and related tax on the sale if the asset is sold now for $58,820. (Refer to
footnote 3.)31. Polycom Technology is considering the
purchase of a new piece of equipment for
$110,000. It has a nine-year midpoint of its asset depreciation range (ADR). It
will require an additional initial investment of $60,000 in nondepreciable
working capital. Fifteen thousand dollars of this investment will be recovered
after the sixth year and will provide additional cash flow for that year.
Income before depreciation and taxes for the next
six years will be:Year Amount1………………… $85,0002………………… 75,0003………………… 60,0004………………… 52,5005………………… 45,0006………………… 40,000The
tax rate is 30 percent. The cost of capital must be computed based onthe following (round the final value to
the nearest whole number):Cost (aftertax)WeightsDebt…………………………………………………..Kd 7.0% 40%Preferred stock…………………………………….Kp10.010Common equity (retained earnings)………..Ke16.050 a. Determine the annual depreciation
schedule. b. Determine annual cash flow. Include
recovered working capital in the sixth year. c. Determine the weighted average cost of
capital. d. Determine the net present value. Should
Polycom Technology purchase the new equipment?32. Graphic Systems purchased a computerized
measuring device two years ago for $80,000. It falls into the five-year
category for MACRS depreciation. The equipment can currently be sold for
$28,400.A new piece of equipment will cost $210,000. 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.YearCash Flow1…………….$76,0002…………….66,0003…………….62,0004…………….60,0005…………….56,0006…………….42,000The
tax rate is 34 percent and the cost of capital is 12 percent. a. What is the book value of the old
equipment? b. What is the tax loss on the sale of the
old equipment? c. What is the tax benefit from the sale? d. What is the cash inflow from the sale of
the old equipment? 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. g. Determine the depreciation schedule for
the remaining years of the old equipment. h. Determine the incremental depreciation between
the old and new equipment and the related tax shield benefits. i. Compute the aftertax benefits of the cost
savings. j. Add the depreciation tax shield benefits
and the aftertax cost savings, and determine the present value. (See Table
12-17 as an example.) k. Compare the present value of the
incremental benefits (j) to the net
cost of the new equipment (e). Should
the replacement be undertaken?COMPREHENSIVE PROBLEMThe Woodruff Corporation purchased a piece
of equipment three years ago for $230,000. It has an asset depreciation range
(ADR) midpoint of eight years. The old equipment can be sold for $90,000.A
new piece of equipment can be purchased for $320,000. It also has an ADR of
eight years.Assume the old and new equipment would provide the following
operating gains (or losses) over the next six years.New EquipmentOld Equipment1………….$80,000$25,0002………….76,00016,0003………….70,0009,0004………….60,0008,0005………….50,0006,0006………….45,000(7,000)The
firm has a 36 percent tax rate and a 9 percent cost of capital. Should the new
equipment be purchased to replace the old equipment?

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