Mississippi River shipyards is considering the replacement of an 8-year-old rive
ID: 2776537 • Letter: M
Question
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 $27,000 to $54,000 per year. The new machine will cost $82,500 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 on 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 20%. The odd machine has been fully depreciated and has no salvage value. What is the NPV of the project? Round your answer to the nearest cost. Should the odd riveting machine be replaced by the new one?Explanation / Answer
Statemnet showing Cash flows Particulars Time PVf@20% Amount PV Cash Outflows - 1.00 (82,500.00) (82,500.00) PV of Cash outflows (82,500.00) Cash inflows 1.00 0.8333 22,800.00 19,000.00 Cash inflows 2.00 0.6944 26,760.00 18,583.33 Cash inflows 3.00 0.5787 22,470.00 13,003.47 Cash inflows 4.00 0.4823 20,160.00 9,722.22 Cash inflows 5.00 0.4019 19,830.00 7,969.23 Cash inflows 6.00 0.3349 18,180.00 6,088.45 Cash inflows 7.00 0.2791 16,200.00 4,521.12 Cash inflows 8.00 0.2326 16,200.00 3,767.60 PV of Cash Inflows 82,655.43 NPV 155.43 Year 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 Increase in Earnings 27,000.00 27,000.00 27,000.00 27,000.00 27,000.00 27,000.00 27,000.00 27,000.00 Less Inc in Depr 16,500.00 26,400.00 15,675.00 9,900.00 9,075.00 4,950.00 Net Increase in Earnings 10,500.00 600.00 11,325.00 17,100.00 17,925.00 22,050.00 27,000.00 27,000.00 Tax @.40 4,200.00 240.00 4,530.00 6,840.00 7,170.00 8,820.00 10,800.00 10,800.00 Inc in Earnings after tax 6,300.00 360.00 6,795.00 10,260.00 10,755.00 13,230.00 16,200.00 16,200.00 Add Depr 16,500.00 26,400.00 15,675.00 9,900.00 9,075.00 4,950.00 Inc CFAT 22,800.00 26,760.00 22,470.00 20,160.00 19,830.00 18,180.00 16,200.00 16,200.00