ABC company is considering replacing one of its equipment which has been in use for the last four years. It costs $1,200,000 to purchase and install, and has been depreciated on a straight-line basis for tax to a book value of $300,000. A buyer has expressed interest in purchasing this equipment for $250,000.

The company has identified two replacement products from 2 different companies.

The first is from KR company where equipment will cost $2,000,000 to purchase and install, is expected to have an economic life of four years, and a salvage value of $200,000 at the end of this period, The second is from POP company where equipment will cost $2,500,000, have an economic life of five years, and is expected to have a salvage value of $250,000 at the end of this period. Both products can be depreciated on a straight-line basis for company tax purposes over four years.

Purchase of either product is expected to increase annual cash inflows by $500,000. However, the POP equipment operating costs are expected to be $100,000 lower per year than the KR equipment.

The companys corporate tax rate is 30% and its required return on investments is 14%.

Do you recommend that the company purchase the KR equipment or the POP equipment?