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.

The firm has a 36 percent tax rate and a 9 percent cost of capital. Should the new equipment be purchased to replace the oldequipment?

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New Equipment $80,000 76,000 70,000 60,000 50.000 45,000 Old Equipment S25,000 16,000 9,000 8,000 6.000 (7,000)