Question

eplacement 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 $84,500 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 $26,000 to $52,000 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 12%. Should the old welder be replaced by the new one?

Old welder -Select-should should not Item 1 be replaced.

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

Answer 1

Solution: 4 0 5 after tax Incremental earnings before depreciation (52000-26000)* (1-0.4) Tax shield on de preciation ** 15600 3893.76 15600 15600 15600 15600 15600 15600 15600 6489.6 6760 10816 26416 22089.619493.76 19493.76 17546.88 0 3893.76 1946.88 0 ОCF 22360 15600 15600 cost of machine Net cash flow x PV factor at 12% PV NPV -84500 -84500 1 0.89286 0.79719 0.711178 -84500 19964.29 21058.67 15722.9412388.64 11061.28 17942.84 22360 26416 22089.619493.76 19493.7617546.88 0.63552 15600 0.56743 0.50663 0.45235 0.40388 8889.80 7056.65 6300.58 15600 Should the old wel der be replaced by the new one? old welder Should be replaced by the new one. *Wokring: 5 Cost x Depreciation rate Depreciation X tax rate 84500 32% 27040 40% 10816 84500 11.52% 9734.4 40% 6489.63893.76 84500 84500 5.76% 4867.2 40% 1946.88 84500 84500 84500 84500 20% 16900 19.20% 11.52% 9734.4 16224 40% 40% 40% 40% 40% Tax shield on de preciation 6760 3893.76 0