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