Replacement Analysis St. Johns River Shipyard\'s welding machine is 15 years old
ID: 2782718 • Letter: R
Question
Replacement Analysis
St. Johns River Shipyard's welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. The new welder will cost $80,000 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 $28,000 to $56,000 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 be replaced. What is the NPV of the project? Round your answer to the nearest cent. $
Explanation / Answer
Tax rate 40% Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Additional Revenue 28,000 28,000 28,000 28,000 28,000 28,000 28,000 28,000 Less: Fixed Cost Less: Depreciation as per table given below 16,000 25,600 15,360 9,216 9,216 4,608 - Profit before tax 12,000 2,400 12,640 18,784 18,784 23,392 28,000 28,000 Tax 4,800 960 5,056 7,514 7,514 9,357 11,200 11,200 Profit After Tax 7,200 1,440 7,584 11,270 11,270 14,035 16,800 16,800 Add Depreciation 16,000 25,600 15,360 9,216 9,216 4,608 - - Cash Profit After tax 23,200 27,040 22,944 20,486 20,486 18,643 16,800 16,800 Depreciation Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Total Cost 80,000 80,000 80,000 80,000 80,000 80,000 Dep Rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Deprecaition 16,000 25,600 15,360 9,216 9,216 4,608 80,000 Calculation of NPV Year Captial Operating cash Annual Cash flow PV factor @ 15% Present values 0 (80,000) (80,000) 1.000 (80,000) 1 23,200 23,200 0.870 20,174 2 27,040 27,040 0.756 20,446 3 22,944 22,944 0.658 15,086 4 20,486 20,486 0.572 11,713 5 20,486 20,486 0.497 10,185 6 18,643 18,643 0.432 8,060 7 16,800 16,800 0.376 6,316 8 16,800 16,800 0.327 5,492 Net Present Value (2,395)