Question

Replacement Analysis

St. Johns River Shipyard's welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. The new welder will cost $81,500 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $27,000 to $54,000 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 40%, and the firm's WACC is 10%. Should the old welder be replaced by the new one?

Old welder should or should not be replaced?

What is the NPV of the project? Round your answer to the nearest cent.

Answer 1

­SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

09:12 W ' vo a 1x 23 ENG 2 25-03-2020 ... o X : UM379 UK 379 x fix ULUM UN UO UPUQ URUSUT UU UV- 380 381 382 383 384 COST MACRS YEAR 385 386 81500 DEPRECIATION BOOK VALUE = COST -DEPRE 20 16300.00 65200.00 32 26080.00 39120.00 19.2 15648.00 23472.00 387 Nm + 388 389 390 391 11.52 11.52 5.76 9388.80 9388.80 4694.40 14083.20 4694.40 0.00 b 392 TAX SAVING DUE TO DEPRECIATION 393 YEAR 394 PVIF @10% 1/(1+r)^n FOR 1ST YEAR 1/(1+0.10)^1 = SAME WAY FOR OTHER YEARS 0.9091 395 396 1 2 PVFACTOR AT 10% 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 DEPRE TAX 40% 16300.00 6520 26080.00 10432 15648.00 6259.2 9388.80 3755.52 9388.80 3755.52 4694.40 1877.76 PV OF TAX SAVING 397 PV OF TAX SAVING 5927.27 8621.49 4702.63 2565.07 2331.88 1059.95 25208.29 398 4 399 400 401 402 ... HPR GMAM EAC MACRS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF ... : |

' W vo a 1x 23 ENG - 09:14 _25-03-2020 23 ... X UP423 X ✓ fr UK UL UM UN UO UP U Q UR US UT UU UV- 402 403 increase in earnings = 54000 - 27000 = 27000 [ TAKEN AS OPERATING CASH FLOW] 404 405 - COST OF MACHINE NPV = NPV = NPV = PV OF OPERATING CASH FLOW + PV OF TAX SAVING DUE TO DEPRECIATION (27000)(1-0.40) X PVIFA @10%, 8 YEARS + 25208.29 - 81500 (27000)(1-0.40) X 5.334926 + 25208.29- 81500 = 30134.09 AS NPV IS POSITIVE, MACHINE SHOULD BE REPLACED 406 407 408 409 410 411 412 413 414 415 416 417 418 note: PVIFA@10%, 8 years (1/r)*(1-(1/(1+r)^n)) (1/0.10)*(1-(1/(1+0.10)^8)) 5.334926 419 420 421 422 423 424 425 wc ... HPR GMAM EAC MACRS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF ... Đ TI