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 $25,000 1 2 76,000 16,000 2 3 70,000 9,000 3 4 60,000 8,000 4 5 50,000 6,000 5 6 45,000 (7,000) 6 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?
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 $25,000 1 2 76,000 16,000 2 3 70,000 9,000 3 4 60,000 8,000 4 5 50,000 6,000 5 6 45,000 (7,000) 6 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?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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 | $25,000 1 |
| 2 | 76,000 | 16,000 2 |
| 3 | 70,000 | 9,000 3 |
| 4 | 60,000 | 8,000 4 |
| 5 | 50,000 | 6,000 5 |
| 6 | 45,000 | (7,000) 6 |
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?
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