Replacement decision analysis

Zagloba Corporation purchased a piece of equipment four years ago for $300,000. It has an asset depreciation range (ADR) midpoint of fourteen years. The old equipment can be sold for $125,000.

A new piece of equipment can be purchased for $400,000. It also has an ADR of 14 years

ADR of 14 years indicates the use of the 7-year MACRS schedule

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

Year	New Equipment	Old Equipment
1	$ 150,000	$ 35,000
2	100,000	20,000
3	80,000	20,000
4	75,000	19,000
5	65,000	15,000
6	45,000	10,000
7	35,000	5,000
8	25,000	(10,000)

The firm has a 35 percent tax rate and an 11 percent cost of capital. Should the new equipment be purchased to replace the old equipment? Calculate the NPV and the IRR of the after tax cost savings and tax shield benefits from depreciation.

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