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 $82,500 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 12%. Should the old welder be replaced by the new one? Old welder -Select- be replaced. What is the NPV of the project? Round your answer to the nearest cent.

Answer 1

Solution: 2 6 after tax Incremental earnings before depreciation (50000-25000)*(1-0.4) Tax shield on de preciation ** 15000 15000 15000 15000 15000 15000 15000 15000 6600.00 10560.00 3801.60 1900.80 6336.00 3801.60 0,00 0.00 16900.80 15000,00 15000.00 21600.00 25560.00 21336.00 18801.6018801.60 OCF cost of machine Net cash flow x PV factor at 12% -82500 -82500 15000 18801.6 0.63552 18801,6 16900.8 21600 25560 21336 15000 0.50663 0,452350.40388 0.56743 0.89286 0.797 19 0.71178 -82500 19285.71 20376.28 15186.54 11948.7610668.53 16371.78 8562.47 6785.246058.25 PV NPV Should the old welder be replaced by the new one? old welder Should be replaced by the new one. (as it has positive NPV) *Wokring: 5 6 8 82500 20% 16500 82500 5.76% 4752 82500 Cost x Depreciation rate Depreciation X tax rate 82500 32% 26400 82500 11.52% 82500 82500 82500 19.20% 15840 11.52% 9504 9504 0 0 40% 40% 40% 40% 40% 40% 40% 40% Tax shield on depreciation 0.00 6600.00 10560.006336.00 3801.60 3801.60 1900.80 0.00