Replacement analysis Mississippi River Shipyards is considering the replacement
ID: 2655136 • 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 $30,000 to $52,000 per year. The new machine will cost $87,500, 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 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.
$ _____
Should the old riveting machine be replaced by the new one?
-Yes or No
Explanation / Answer
Incremental Depreciation Depreciation Income after Tax Add back Cash Year Income %age Depreciation at 40% EAT Depreciation Inflows 1 22000 20% 17500 4500 1800 2700 17500 20200 2 22000 32% 28000 -6000 -2400 -3600 28000 24400 3 22000 19% 16625 5375 2150 3225 16625 19850 4 22000 12% 10500 11500 4600 6900 10500 17400 5 22000 11% 9625 12375 4950 7425 9625 17050 6 22000 6% 5250 16750 6700 10050 5250 15300 7 22000 0 22000 8800 13200 0 13200 8 22000 0 22000 8800 13200 0 13200 Cash flows PV factor Present Year Cash flows at 10% Value 0 -87500 1 -87500.00 1 20200 0.909091 18363.64 2 24400 0.826446 20165.29 3 19850 0.751315 14913.60 4 17400 0.683013 11884.43 5 17050 0.620921 10586.71 6 15300 0.564474 8636.45 7 13200 0.513158 6773.69 8 13200 0.466507 6157.90 Total 53100 9981.70 Answer: 9981.7