The Woodruff Corporation purchased a piece of equipment three years ago for $230,000.

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.

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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$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 equipment?

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