Lancaster Corporation (replacement decision analysis) The Lancaster Corporation purchased a piece of equipment three years ago for $250,000. It has an asset depreciation range (ADR) midpoint of eight years (i.e. use the 5-year MACRS schedule). The old equipment can be sold for $97,920. A new piece of equipment can be purchased for $360,000. It also has an ADR of eight years (again, use the 5-year MACRS schedule). Assume the old and new equipment would provide the following operating gains (or losses) over the next six years.

Year New Equipment Old Equipment

1............... $100,000 $36,000

2............... 86,000 26,000

3............... 80,000 19,000

4............... 72,000 18,000

5............... 62,000 16,000

6............... 43,000 (9,000)

The firm has a 36 percent tax rate and a 9 percent cost of capital.

a. Calculate the book value of the existing equipment.

b. Calculate the net cost of the new equipment.

c. Prepare a depreciation schedule for the new equipment.

d. Prepare a depreciation schedule for the remaining three years on the existing equipment.

e. Prepare a schedule of incremental depreciation and tax shield benefits if the firm were to purchase the new equipment.

f. Prepare a schedule of after-tax savings that would result from the purchase of the new equipment.

g. Calculate the Net Present Value (NPV) of the investment in the new equipment.

h. Should the new equipment be purchased to replace the old equipment?