Replacement analysis Mississippi River Shipyards is considering the replacement
ID: 2655319 • 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 $54,000 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 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
Ans
Old machine should be replaced since the replacement decision gives positive NPV.
Workings
Dep Schedule
Details Details Amount Initial Cost -87,500.00 Total Cash Outflow A -87,500.00 Increase in Cash earnings net of tax Per Annum (54000-24000)*(1-.40) 18,000.00 PV AF of 18@ for 8 years 4.07757 Discounted value of Increase in earnings 73,396.18 Discounted value of tax savings on Depreciation 22,650.35 Total Cash inflow B 96,046.54 NPV A+B 8,546.54