Question

The Woodruff Corporation purchased a piece of equipment three years ago for $248,000. It has an asset depreciation range (ADR) midpoint of eight years. The old equipment can be sold for $93,250.

A new piece of equipment can be purchased for $324,000. 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:

Year New Equipment Old Equipment 1............... $81,500 $24,000 2............... 76,000 14,000 3............... 70,000 9,250 4............... 60,000 6,250 5............... 52,000 6,500 6............... 44,500 -6,250

The firm has a 25 percent tax rate and a 9 percent cost of capital.

What is the net cost of the new equipment? Round your solution to two decimal places.

What is the present value of incremental benefits? Round your solution to two decimal places.

What is the NPV of this replacement decision? Round your solution to two decimal places.

Answer 1

1.)	Net Cost of new equipment	$ 230,750	(324,000 - 93,250 )
2.)	Present Value of Incremental Benefits
	Year	Net Income (loss) of new equipment	Net Income (loss ) of old equipment	Incremental	Present Value	Present
		( Operating Gain (loss) x ( 1-25%) )	( Operating Gain(loss) x ( 1-25%) )	Benefits	Factor @ 9%	Value $
	1	61,125	18,000	43,125	0.91743	39,564.22
	2	57,000	10,500	46,500	0.84168	39,138.12
	3	52,500	6,938	45,563	0.77218	35,182.61
	4	45,000	4,688	40,313	0.70843	28,558.39
	5	39,000	4,875	34,125	0.64993	22,178.91
	6	33,375	-4,688	38,063	0.59627	22,695.43
	Total	288,000	40,313	247,688		187,317.67
	Present of Incremental benefits is $ 187,317.67
3.)	Net Present value of this replacement decision is - $ 43,432.33 ( 187,317.67 - 230,750 ) .