Problem 12-11 Replacement analysis Mississippi River Shipyards is considering th
ID: 2652650 • Letter: P
Question
Problem 12-11
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 $30,000 to $46,000 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 10%. 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
Ans
Particulars Amount Initial Investmemt 90,000.00 Increase in Cash flow earnings for the year Net of Tax 9,600.00 WACC 10% Annuity Factor for 10% 8years 5.3349 Present value of cash flow over the project 51,215 PV of Tax Savings for Depreciation 27,833.84 Total PV of Cash inflows 79,088 NPV -10,951