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:

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.

Ye 1 2 3 4 5 6 O UWN New Equipment $80,000 76,000 70,000 60,000 50,000 45,000 Old Equipment $25,000 16,000 9,000 8,000 6,000 (7,000) Year 1 2 3 4 5 6 0 1 AN