Question

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. Question: The firm has a 25 percent tax rate and a 9 percent cost of capital. Should the new equipment be purchased to replace the old equipment? Explain your answer.

Ye	New Equipment	Old Equipment                    Year
1	$80,000	$25,000                                  1
2	76,000	16,000                                   2
3	70,000	9,000                                      3
4	60,000	8,000                                     4
5	50,000	6,000                                      5
6	45,000	(7,000)                                    6

Answer 1

go