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    Capital budgeting - Woodruff Corporation

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    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.

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    Solution Summary

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