Problem 12-11 Replacement analysis Mississippi River Shipyards is considering th
ID: 2777057 • 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 $50,000 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; 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 12%. The old machine has been fully depreciated and has no salvage value.
a. What is the NPV of the project? Round your answer to the nearest cent.
$
b. Should the old riveting machine be replaced by the new one?
-Select-YesNoItem 2
Explanation / Answer
Statemnet showing Cash flows Particulars Time PVf@12% Amount PV Cash Outflows - 1.00 (82,500.00) (82,500.00) PV of Cash outflows (82,500.00) Cash inflows 1.00 0.8929 18,600.00 16,607.14 Cash inflows 2.00 0.7972 22,560.00 17,984.69 Cash inflows 3.00 0.7118 18,270.00 13,004.23 Cash inflows 4.00 0.6355 15,960.00 10,142.87 Cash inflows 5.00 0.5674 15,630.00 8,868.88 Cash inflows 6.00 0.5066 13,980.00 7,082.70 Cash inflows 7.00 0.4523 12,000.00 5,428.19 Cash inflows 8.00 0.4039 12,000.00 4,846.60 PV of Cash Inflows 83,965.30 NPV 1,465.30 Year 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 Increase in Earnings 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00 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 3,500.00 (6,400.00) 4,325.00 10,100.00 10,925.00 15,050.00 20,000.00 20,000.00 Tax @.40 1,400.00 (2,560.00) 1,730.00 4,040.00 4,370.00 6,020.00 8,000.00 8,000.00 Inc in Earnings after tax 2,100.00 (3,840.00) 2,595.00 6,060.00 6,555.00 9,030.00 12,000.00 12,000.00 Add Depr 16,500.00 26,400.00 15,675.00 9,900.00 9,075.00 4,950.00 Inc CFAT 18,600.00 22,560.00 18,270.00 15,960.00 15,630.00 13,980.00 12,000.00 12,000.00 Yes Old machine should be replaced since NPV is positive