Should the new equipment be purchased to replace the old

Reference no: EM13305970

The Woodruff Corporation purchased a piece of equipment threeyears ago for $230,000. It has an asset depreciation range(ADR) midpoint of 8 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 8 years. Assume the oldand new equipment would provide the following operating gains (orlosses) over the next 6 years.
Year NewEquipment OldEquipment
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?

Reference no: EM13305970

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