Instructions:
The Woodruff Corporation purchased a piece of equipment three years ago for $265,000. It has an asset depreciation range (ADR) midpoint of eight years. The old equipment can be sold for $82,000.
A new piece of equipment can be purchased for $327,000. It also has an ADR of eight years. Additionally, the firm has the option to spend $20,000 to overhaul and repair the old equipment; assume that if they do so, the operating cash flows for the old machine below will be $5,000 higher in each year but there are no other changes.
Assume the old and new equipment would provide the following operating cash flows over the next six years:
| Year | New Equipment | Old Equipment |
| 1 | $72,000 | $21,000 |
| 2 | 72,000 | 11,000 |
| 3 | 66,000 | 8,000 |
| 4 | 59,000 | 6,000 |
| 5 | 53,000 | 4,000 |
| 6 | 50,000 | (6,000) |
Question: The firm has a 25 percent tax rate and a 8.25% cost of capital. Should the new equipment be purchased to replace the old equipment? Should the firm fix the existing equipment instead?
Show your calculations and explain your answer. Note that you may not need all of the information provided.
Submission Instructions:
Submit your response in an Excel document.
Grading Rubric:
Your assignment will be graded according to the grading rubric.
