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

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St. Johns River Shipyards' welding machine is 15 years old,fully depreciated, and has no salvage value. However, even thoughit is old, it is still functional as originally designed and can beused for quite a while longer. The new welder will cost $83,500 andhave an estimated life of 8 years with no salvage value. The newwelder will be much more efficient, however, and this enhancedefficiency will increase earnings before depreciation from $29,000to $58,000 per year. The new machine will be depreciated over its5-year MACRS recovery period, so the applicable depreciation ratesare 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Theapplicable corporate tax rate is 40%, and the project cost ofcapital is 14%. Should the old welder be replaced by the new one?What is the NPV of the project? Please help it's urgent!
Anyone please am getting answer in negative so please i needyour help!

Answer & Explanation Solved by verified expert

4.1 Ratings (494 Votes)

Time line		0	1	2	3	4	5	6	7	8



Cost of new machine		-83500

=Initial Investment outlay		-83500

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%		-16700	-26720	-16032	-9619.2	-9619.2	-4809.6	0	0

=Pretax cash flows			12300	2280	12968	19380.8	19380.8	24190.4	29000	29000
-taxes	=(Pretax cash flows)*(1-tax)		7380	1368	7780.8	11628.48	11628.48	14514.24	17400	17400
+Depreciation			16700	26720	16032	9619.2	9619.2	4809.6	0	0
=after tax operating cash flow			24080	28088	23812.8	21247.68	21247.68	19323.84	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		-83500	24080	28088	23812.8	21247.68	21247.68	19323.84	17400	17400
Discount factor=	(1+discount rate)^corresponding period	1	1.14	1.2996	1.481544	1.6889602	1.9254146	2.1949726	2.502269	2.8525864
Discounted CF=	Cashflow/discount factor	-83500	21122.81	21612.8	16072.962	12580.332	11035.379	8803.6816	6953.689	6099.7276
NPV=	Sum of discounted CF=	20781.38265

Accept replacement as NPV is positive

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Transcribed Image Text

St. Johns River Shipyards' welding machine is 15 years old,fully depreciated, and has no salvage value. However, even thoughit is old, it is still functional as originally designed and can beused for quite a while longer. The new welder will cost $83,500 andhave an estimated life of 8 years with no salvage value. The newwelder will be much more efficient, however, and this enhancedefficiency will increase earnings before depreciation from $29,000to $58,000 per year. The new machine will be depreciated over its5-year MACRS recovery period, so the applicable depreciation ratesare 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Theapplicable corporate tax rate is 40%, and the project cost ofcapital is 14%. Should the old welder be replaced by the new one?What is the NPV of the project? Please help it's urgent!Anyone please am getting answer in negative so please i needyour help!