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Capital budgeting - Woodruff Corporation

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 8 years.

Assume the old and new equipment would provide the following operating gains(or losses) over the next 6 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 ($7000)

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

Explain why, showing each step.

Solution Summary

The solution explains the capital budgeting analysis for Woodruff Corporation replacement decision.