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:

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

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?

Answer rating: 100% (QA)

P 4 N R 43 Purchase price Total depreciation to date Book value Book Value of Old Equipment ADR of 8 ... View the full answer