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

Ye New Equipment. Old Equipment Year

1 $80,000 1 $25,000

2 76,000 2 $16,000

3 70,000 3. $ 9,000

4 60,000 4. $8,000

5 50,000 5. $ 6,000

6 45,000 6. (7,000)

Question:

The firm has a 25 percent tax rate and a 9 percent cost of capital. Should the new equipment be purchased to replace the old equipment? Explain your answer.