High Tech Production Inc. purchased a computerized measuring device two years ago for $80,000. This equipment falls into the five-year category for MACRS depreciation. The equipment can currently be sold for $28,400. A new piece of equipment will cost $210,000 that would replace the exisitng equipment. It also falls into the five-year category for MACRS depreciation. It is anticipated this new piece of equipment will be sold at the end of the 5th year of operation for a price of $20,000. The tax rate is 34 percent and the cost of capital is 12 percent.
The new equipment would provide the following stream of operating cost savings before depreciation and taxes for the next five years.