Replacement Analysis St. Johns River Shipyards\'s welding machine is 15 years ol
ID: 2725906 • Letter: R
Question
Replacement Analysis
St. Johns River Shipyards's welding machine is 15 years old, fully depreciated, obsolete, and has no salvage value. However, even though it is obsolete, it is perfectly functional as originally designed and can be used for quite a while longer. The new welder will cost $84,000, and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $29,000 to $58,000 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 40%, and the firm's WACC is 15%. Should the old welder be replaced by the new one?
Old welder -Select-shouldshould notItem 1 be replaced.
What is the NPV of the project? Round your answer to the nearest cent.
$
Explanation / Answer
St.John's River Shipyards All Amounts in $ For calculating the NPV, we need to work out certain basic values Cash Outflows Cost of New Welder 84000 Cash Inflows per year Year 1 2 3 4 5 6 7 8 Increase in Revenue 29000 29000 29000 29000 29000 29000 29000 29000 ($58,000 - $29,000) Depreciation on Welder 16800 26880 16128 9676.8 9676.8 4838.4 Net Income before tax 12200 2120 12872 19323.2 19323.2 24161.6 29000 29000 Tax impact @ 40% 4880 848 5148.8 7729.28 7729.28 9664.64 11600 11600 Income post Taxes 7320 1272 7723.2 11593.92 11593.92 14496.96 17400 17400 Add : Depreciation 16800 26880 16128 9676.8 9676.8 4838.4 Net Cash Inflows 24120 28152 23851.2 21270.72 21270.72 19335.36 17400 17400 WACC of the Company 15% Based on the information thus provided, the Net Present Value of the welder works out to $ 15,016.47 Since the Net Present Value this worked is positive, the welder should be replaced.