Assume a firm purchased tech equipment three years ago for $90,000. Let's assume the tech equipment can be sold for $45,000. A new computer will cost $200,000 but provide cost savings and operating benefits, compared to the old computer, of $24,000 per year for the next six years. Both will have no salvage value after 6 years.
These cost savings and operating benefits are the equivalent of increased earnings before depreciation and taxes. The firm has a 35% tax rate and a 10 percent cost of capital.
a) What is the book value of the old tech equipment?
b) What will be the taxable gain or loss if the old tech equipment is sold?
c) What is the net cost of the new tech equipment?
d) What are the annual tax shied benefits of purchasing the new equipment?
e) What are the annual aftertax savings?
f) Using the following Net Present Value table, what is the present value of the incremental benefits?
g) Based on the financial analysis, do you recommend purchasing the new tech equipment?
Year Present value factor (10%)
1 0.909
2 0.826
3 0.751
4 0.683
5 0.621
6 0.564