Mississippi River Shipyards is considering the replacement of an 8-year-old rive
ID: 2476251 • Letter: M
Question
Mississippi River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $24,000 to $48,000 per year. The new machine will cost $82,500, 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.
Explanation / Answer
New machinery cost = $82500 Calculation of depreciation MACRS % for 5 years Year Depreciation % Depreciation 1 20% $16,500 2 32% $26,400 3 19% $15,675 4 12% $9,900 5 11% $9,075 6 6% $4,950 Calculation of after tax cash flows Year Incremental earnings before depreciation Depreciation Earning before tax Tax @ 40% Profit after tax Depreciation After tax cash flow A B C= A-B D E = C - D F E + F 1 $24,000 $16,500 $7,500 $3,000 $4,500 $16,500 $21,000 2 $24,000 $26,400 -$2,400 $0 -$2,400 $26,400 $24,000 3 $24,000 $15,675 $8,325 $3,330 $4,995 $15,675 $20,670 4 $24,000 $9,900 $14,100 $5,640 $8,460 $9,900 $18,360 5 $24,000 $9,075 $14,925 $5,970 $8,955 $9,075 $18,030 6 $24,000 $4,950 $19,050 $7,620 $11,430 $4,950 $16,380 7 $24,000 $24,000 $9,600 $14,400 $14,400 8 $24,000 $24,000 $9,600 $14,400 $14,400 Calculation of NPV of the project at 16% WACC Year Cash flow PV factor @16% Present value A B A * B 0 -$82,500 1 -$82,500 1 $21,000 0.862068966 $18,103 2 $24,000 0.743162901 $17,836 3 $20,670 0.640657674 $13,242 4 $18,360 0.552291098 $10,140 5 $18,030 0.476113015 $8,584 6 $16,380 0.410442255 $6,723 7 $14,400 0.35382953 $5,095 8 $14,400 0.305025457 $4,392 Net present value 1,616.69