Question

The Woodruff Corporation purchased a piece of equipment three years ago for $212,000. It has an asset depreciation range (ADR) midpoint of eight years. The old equipment can be sold for $95,000.

A new piece of equipment can be purchased for $322,000. 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............... $81,750 $27,000 2............... 77,500 16,500 3............... 70,500 9,250 4............... 58,250 6,250 5............... 50,000 5,750 6............... 47,000 -5,750

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

a) Net cost of new equipment = $ 227000

b) Present Value of Incremental benefit = $ 180637.69

c) NPV of replacement decision = $ - 46362.31