Question

REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $27,000 to $56,000 per year. The new machine will cost $85,000, and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 16%. The old machine has been fully depreciated and has no salvage value. What is the NPV of the project? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. Should the old riveting machine be replaced by the new one?

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins Formulas - 2x Σ AutoSum : A 11 A = = = V General A A Wrap Text Merge Merge & Center - Center SF $ % % , 4:0 .00 :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill Clear File Home Insert Page Layout % Cut Calibri Ea Copy Paste Format Painter BIU - D Clipboard Font US277 - for UL U UK 272 273 Sort & Filter Editing Find & Select Alignment Number Cells ULUM UN U O UPUQ UR US UT UU UV- COST MACRS 274 YEAR NM + in 85000 DEPRECIATION BOOK VALUE = COST -DEPRE 17000.00 68000.00 27200.00 40800.00 16150.00 24650.00 10200.00 14450.00 9350.00 5100.00 5100.00 0.00 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 PVIF @16% 1/(1+r)^n FOR 1ST YEAR 1/(1+0.16)^1 = SAME WAY FOR OTHER YEARS 0.8621 TAX SAVING DUE TO DEPRECIATION YEAR DEPRE TAX 40% 1 17000.00 6800 2 27200.00 10880 3 16150.00 6460 4 10200.00 4080 5 9350.00 3740 6 5100.00 2040 PV OF TAX SAVING PVFACTOR AT 16% 0.8621 0.7432 0.6407 0.5523 0.4761 0.4104 PV OF TAX SAVING 5862.07 8085.61 4138.65 2253.35 1780.66 837.30 22957.64 H invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND STI I RRnpvbeta RATION PBP ARR ferences: DX15 OPTION TO WAIT BOU 120% 1 + SPOR 9 * ENG 31-10-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins Formulas - 2x Σ AutoSum : A 11 A = = = V General A A SF Wrap Text Merge Merge & Center - Center e $ 4:0 .00 :.: Insert Delete Format % % , Number File Home Insert Page Layout % Cut Calibri Ea Copy Paste Format Painter BIU - D Clipboard Font UR303 - for UI U UK 292 293 Conditional Format Formatting as Table Styles Cell Styles Fill 2 Clear Sort & Filter Editing Find & Select Alignment Cells ULUM UN UO UPUQUR US UT UU UV increase in earnings = 56000-27000 = 29000 [ TAKEN AS OPERATING CASH FLOW] 294 NPV = - COST OF MACHINE NPV = 295 296 297 298 299 PV OF OPERATING CASH FLOW + PV OF TAX SAVING DUE TO DEPRECIATION (29000)(1-0.40) X PVIFA @16%, 8 YEARS + 22957.64 - 85000 (29000)(1-0.40) X 4.343591 +22957.64 - 85000 = 13536.12 NPV = AS NPV IS POSITIVE, MACHINE SHOULD BE REPLACED 300 301 302 303 note: PVIFA@16%, 8 years (1/r)*(1-(1/(1+r)^n)) (1/0.16)*(1-(1/(1+0.16)^8)) 4.343591 304 305 306 307 308 309 310 311 312 H invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND I RRnpvbeta RATION PBP ARR ferences: DX15 OPTION TO WAIT BO! 120% STI Rea 1 + SPOR 9 * ENG 31-10-2019