St. Johns River Shipyard’s welding machine is 15 years old, fully depreciated, and has no salvage...

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St. Johns River Shipyard’s 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. A new welder will cost $182,500 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 $27,000to $47,000 per year. The new machine will be depreciated over its5-year MACRS recovery period, so the applicable depreciation ratesare 20%, 32%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicablecorporate tax rate is 40%, and the project cost of capital is 12%.Should the old welder be replaced by the new one?

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St. Johns River Shipyard’s 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. A new welder will cost $182,500 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 $27,000to $47,000 per year. The new machine will be depreciated over its5-year MACRS recovery period, so the applicable depreciation ratesare 20%, 32%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicablecorporate tax rate is 40%, and the project cost of capital is 12%.Should the old welder be replaced by the new one?