St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage...

3.9 Ratings (649 Votes)

Time line		0	1	2	3	4	5	6	7	8



Cost of new machine		-80000

=Initial Investment outlay		-80000

5 years MACR rate			20.00%	32.00%	19.20%	11.52%	11.52%	5.76%	0.00%	0.00%

Profits			29000	29000	29000	29000	29000	29000	29000	29000


-Depreciation	=Cost of machine*MACR%		-16000	-25600	-15360	-9216	-9216	-4608	0	0

=Pretax cash flows			13000	3400	13640	19784	19784	24392	29000	29000
-taxes	=(Pretax cash flows)*(1-tax)		7800	2040	8184	11870.4	11870.4	14635.2	17400	17400
+Depreciation			16000	25600	15360	9216	9216	4608	0	0
=after tax operating cash flow			23800	27640	23544	21086.4	21086.4	19243.2	17400	17400




+Tax shield on salvage book value	=Salvage value * tax rate									0
=Terminal year after tax cash flows										0

Total Cash flow for the period		-80000	23800	27640	23544	21086.4	21086.4	19243.2	17400	17400
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331	1.4641	1.61051	1.771561	1.9487171	2.1435888
Discounted CF=	Cashflow/discount factor	-80000	21636.36364	22842.975	17688.956	14402.295	13092.995	10862.285	8928.951257	8117.2284
NPV=	Sum of discounted CF=	37572.05

Replace welder as incremental NPV is positive

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