The Woodruff Corporation purchased a piece of equipment three years ago for $247,000. It has an...

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Finance

The Woodruff Corporation purchased a piece of equipment threeyears ago for $247,000. It has an asset depreciation range (ADR)midpoint of eight years. The old equipment can be sold for$92,250.

A new piece of equipment can be purchased for $305,000. It also hasan ADR of eight years.

Assume the old and new equipment would provide the followingoperating gains (or losses) over the next six years:

Year New Equipment Old Equipment
1............... $78,250 $25,500
2............... 75,250 15,000
3............... 68,750 9,500
4............... 58,500 6,250
5............... 51,000 6,500
6............... 44,250 -8,250
The firm has a 36 percent tax rate and a 9 percent cost ofcapital.
What is the net cost of the new equipment? Round your solutionto two decimal places.
What is the present value of incremental benefits? Round yoursolution to two decimal places.
What is the NPV of this replacement decision? Round yoursolution to two decimal places.

Answer & Explanation Solved by verified expert

4.1 Ratings (621 Votes)

A Calculating net cost of new equipment Book value of old equipment ADR of 8 years indicates the use of the 5year MACRS schedule Year Depreciation Depreciation Annual depreciation 1 247000 02 49400 2 247000 032 79040 3 247000 0192 47424 Total Depreciation rate 175864 Purchase price 247000 Total depreciation to date 175864 Book Value 71136 Tax obligation on sale Sale price 92250 Book value 71136 Taxable gain 21114 Tax rate 36 Taxes 760104 Cash Inflow from the sale of old equipment Sale price See Answer

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Transcribed Image Text

The Woodruff Corporation purchased a piece of equipment threeyears ago for $247,000. It has an asset depreciation range (ADR)midpoint of eight years. The old equipment can be sold for$92,250.A new piece of equipment can be purchased for $305,000. It also hasan ADR of eight years.Assume the old and new equipment would provide the followingoperating gains (or losses) over the next six years: YearNew EquipmentOld Equipment1...............$78,250$25,5002...............75,25015,0003...............68,7509,5004...............58,5006,2505...............51,0006,5006...............44,250-8,250The firm has a 36 percent tax rate and a 9 percent cost ofcapital.What is the net cost of the new equipment? Round your solutionto two decimal places.What is the present value of incremental benefits? Round yoursolution to two decimal places.What is the NPV of this replacement decision? Round yoursolution to two decimal places.