Replacement Analysis St. Johns River Shipyards\' welding machine is 15 years old
ID: 2787347 • Letter: R
Question
Replacement Analysis St. Johns River Shipyards' 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 However, even though it is obsolete, it is perfectly functional as originally designed and can be used for quite a while longer.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 $182,500, 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 $27,000 to $74,000 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 12%. Should the old welder be replaced by the new one? Old welder be replaced. What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest cent.
Explanation / Answer
Incremental earning :74000-27000 =47000
NPV =Present value -Initial investment
= 193968.48-182500
= $ 11468.48
1 2 3 4 5 6 7 8 Total present value Earning before depreciation and tax 47000 47000 47000 47000 47000 47000 47000 47000 Less:Depreciation -36500 [182500*.20] -58400 [182500*.32] -35040 [182500*.192] -21024 [182500*11.52%] -21024 10512 [182500*5.76%] 0 0 Earning before tax 10500 -11400 11960 25976 25976 36488 47000 47000 less:tax -4200 [10500*.40] -4560 [-11400*.40] -4784 -10390.4 -10390.40 -14595.2 -18800 -18800 Earning after tax 6300 -6840 7176 15585.6 15585.6 21892.8 28200 28200 Add:depreciation (non cash) 36500 58400 35040 21024 21024 10512 0 0 cash flow 42800 51560 42216 36609.60 36609.6 32404.8 28200 28200 PVF@12% .89286 .79719 .71178 .63552 .56743 .50663 .45235 .40388 present value [Cash flow*PVF] 38214.41 41103.12 30048.50 23266.13 20773.39 16417.24 12756.27 11389.42 193968.48