Pinnacle Custom Home Builders purchased a 40 foot articulating boom lift three years ago for $55,000. The equipment has been depreciated under the 5-year MACRS schedule (205, 32%, 19%, 12%, 12%, and 5%). The old equipment can be sold for $35,000.

Pinnacle is considering the purchase of a new 60 foot articulating boom lift that would allow the company to complete nearly all of its construction projects without the need for costly rental lifts. The new lift could be purchased for $105,000 and would also fall under the 5-year MACRS depreciation schedule.

Assume the old and the new equipment would provide the following operating gains (losses) over the next six years.

New Old

1........ $40,000 $25,000

2........ 38,000 16,000

3........ 35,000 9,000

4........ 30,000 8,000

5........ 25,000 6,000

6........ 22,500 5,000

The firm has a 30% tax rate and 7% cost of capital. Should the new equipment be purchased to replace the old? Why?