Replacement Analysis St. Johns River Shipyard's welding machine is 15 years old, fully depreciated, and has...

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Replacement Analysis St. Johns River Shipyard's welding machineis 15 years old, fully depreciated, and has no salvage value.However, even though it is old, it is still functional asoriginally designed and can be used for quite a while longer. Thenew welder will cost $84,500 and have an estimated life of 8 yearswith no salvage value. The new welder will be much more efficient,however, and this enhanced efficiency will increase earnings beforedepreciation from $29,000 to $58,000 per year. The new machine willbe depreciated over its 5-year MACRS recovery period, so theapplicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%,11.52%, and 5.76%. The applicable corporate tax rate is 40%, andthe firm's WACC is 14%. Should the old welder be replaced by thenew one? Old welder be replaced. What is the NPV of the project?Round your answer to the nearest cent.

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3.7 Ratings (392 Votes)

Annual Operating cashflows
	Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Year-8
Incremental revenue	29000	29000	29000	29000	29000	29000	29000	29000
Less: Depreciation	16900	27040	16224	9734.4	9734.4	4867.2
Before tax Income	12100	1960	12776	19265.6	19265.6	24132.8	29000	29000
Less: tax @ 40%	4840	784	5110.4	7706.24	7706.24	9653.12	11600	11600
After tax Income	7260	1176	7665.6	11559.36	11559.36	14479.68	17400	17400
Add: Dep	16900	27040	16224	9734.4	9734.4	4867.2	0	0
Annual operating cashflows	24160	28216	23889.6	21293.76	21293.76	19346.88	17400	17400
PVF at 14%	0.877193	0.769468	0.674972	0.59208	0.519369	0.455587	0.399637	0.350559
Present value of CF	21192.982	21711.3	16124.8	12607.62	11059.31	8814.178	6953.689	6099.728
Total Present value of Cf	104563.6
Less: Initial Investment	84500
NPV	20063.6

Yes, machine shall be replaced

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Replacement Analysis St. Johns River Shipyard's welding machineis 15 years old, fully depreciated, and has no salvage value.However, even though it is old, it is still functional asoriginally designed and can be used for quite a while longer. Thenew welder will cost $84,500 and have an estimated life of 8 yearswith no salvage value. The new welder will be much more efficient,however, and this enhanced efficiency will increase earnings beforedepreciation from $29,000 to $58,000 per year. The new machine willbe depreciated over its 5-year MACRS recovery period, so theapplicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%,11.52%, and 5.76%. The applicable corporate tax rate is 40%, andthe firm's WACC is 14%. Should the old welder be replaced by thenew one? Old welder be replaced. What is the NPV of the project?Round your answer to the nearest cent.