Mississippi River Shipyards is considering the replacement of an 8-year-old rive
ID: 2634503 • 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 $80,000, 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.
$ ______
Should the old riveting machine be replaced by the new one? (Yes or No)
_________
Explanation / Answer
Since NPV is positive , so the old riveting machine be replaced by the new one.
Year 0 1 2 3 4 5 6 7 8 Initial investment -80,000 Increase in Earning 24000 24000 24000 24000 24000 24000 24000 24000 Depreciation(MACRS) 20% 32% 19% 12% 11% 6% 0% 0% Depreciation 16000 25600 15200 9600 8800 4800 0 0 PBT 8000 -1600 8800 14400 15200 19200 24000 24000 Tax@40% 3200 0 3520 5760 6080 7680 9600 9600 PAT 4800 -1600 5280 8640 9120 11520 14400 14400 Cash flow(PAT+ Dep) -80,000 20800 24000 20480 18240 17920 16320 14400 14400 P.V @16% -80000 17931.03448 17835.90963 13120.67 10073.78963 8531.9452 6698.418 5095.145 4392.367 NPV 3679.2775