Problem 13-10 Replacement Analysis St. Johns River Shipyard\'s welding machine i
ID: 2782972 • Letter: P
Question
Problem 13-10 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 $83,000 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 $25,000 to $50,000 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 14%. 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
We shall calculate the NPV of the replacement decision as follows:
Since NPV is positive, it is better to replace
Note: Cash flows after tax is earnings after tax plus depreciation
Year Incremental earnings Incremental Depreciation Earnings after depreciation Tax @40% Earnings after tax Cash flows after tax PV Factor Present Value 0 -83000 1 -83000 1 25000 16600 8400 3360 5040 21640 0.8772 18982.46 2 25000 26560 -1560 -624 -936 25624 0.7695 19716.84 3 25000 15936 9064 3625.6 5438.4 21374.4 0.6750 14427.11 4 25000 9561.60 15438.4 6175.36 9263.04 18824.64 0.5921 11145.7 5 25000 9561.60 15438.4 6175.36 9263.04 18824.64 0.5194 9776.928 6 25000 4780.80 20219.2 8087.68 12131.52 16912.32 0.4556 7705.025 7 25000 0.00 25000 10000 15000 15000 0.3996 5994.56 8 25000 0.00 25000 10000 15000 15000 0.3506 5258.386 NPV 10007.00