Question
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
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: (SEE IMAGE).
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.
\begin{tabular}{|llll} \hline Ye & New Equipment & Old Equipment & Year \\ \hline 1 & $80,000 & $25,000 & 1 \\ \hline 2 & 76,000 & 16,000 & 2 \\ \hline 3 & 70,000 & 9,000 & 3 \\ \hline 4 & 60,000 & 8,000 & 4 \\ \hline 5 & 50,000 & 6,000 & 5 \\ \hline 6 & 45,000 & (7,000) & 6 \\ \hline \end{tabular}Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started