Replacement analysis Mississippi River Shipyards is considering the replacement
ID: 2649492 • Letter: R
Question
Replacement analysis
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 $50,000 per year. The new machine will cost $90,000, 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 18%. 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?
-Select-YesNoItem 2
Explanation / Answer
Statement showing calculation of Present Value System A Particulars Time PVF@10% Amount PV Cash Outflows - 1.00 (90,000.00) (90,000.00) PV of Cash Outflows (90,000.00) Cash Inflows 1.00 0.8475 22,800.00 19,322.03 Cash Inflows 2.00 0.7182 27,120.00 19,477.16 Cash Inflows 3.00 0.6086 22,440.00 13,657.68 Cash Inflows 4.00 0.5158 19,920.00 10,274.51 Cash Inflows 5.00 0.4371 19,560.00 8,549.86 Cash Inflows 6.00 0.3704 17,760.00 6,578.86 Cash Inflows 7.00 0.3139 15,600.00 4,897.23 Cash Inflows 8.00 0.2660 15,600.00 4,150.20 PV of Cash Inflows 4.0776 86,907.53 NPV (3,092.47) Particulars 1.00 2.0000 3.00 4.00 5.00 6.00 7-8 Increase in earnings 26,000.00 26,000.00 26,000.00 26,000.00 26,000.00 26,000.00 26,000.00 Less Depreciation 18,000.00 28,800.00 17,100.00 10,800.00 9,900.00 5,400.00 Earnings after dep 8,000.00 (2,800.00) 8,900.00 15,200.00 16,100.00 20,600.00 26,000.00 Tax @40% 3,200.00 (1,120.00) 3,560.00 6,080.00 6,440.00 8,240.00 10,400.00 Earnings after Tax 4,800.00 (1,680.00) 5,340.00 9,120.00 9,660.00 12,360.00 15,600.00 Add : Depr 18,000.00 28,800.00 17,100.00 10,800.00 9,900.00 5,400.00 Cash Flows after tax 22,800.00 27,120.00 22,440.00 19,920.00 19,560.00 17,760.00 15,600.00 No it should not be replaced as NPV is negative