Question

Problem 13-10 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 $80,500 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 $25,000 to $50,000 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 14%. Should the old welder be replaced by the new one? Old welder be replaced. What is the NPV of the project? Round your answer to the nearest cent. $

Answer 1

			YEar0	Yeara1	YEear2	Year3	YEar4	YEar5	YEar6	YEar7	YEar8
Initial investment			-80500
Depreciation rate				20%	32%	19.20%	11.52%	11.52%	5.76%
Depreciation expenses				16100	25760	15456	9273.6	9273.6	4636.8	0	0
Incremental revenue after tax				15000	15000	15000	15000	15000	15000	15000	15000
(50000-25000)-40%)
Tax shield on dep				6440	10304	6182.4	3709.44	3709.44	1854.72	0	0
(Depreciaton expenses*40%)
Annual cashflows			-80500	21440	25304	21182.4	18709.44	18709.44	16854.72	15000	15000
PVF at 14%			1	0.877193	0.769468	0.674972	0.59208	0.519369	0.455587	0.399637	0.350559
Present value of CF			-80500	18807.02	19470.61	14297.52	11077.49	9717.097	7678.784	5994.56	5258.386
NPV			11801.46
Yes, old machine replaced