Question

St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $27,000 to $52,000 per year. The new machine will cost $82,500, and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period; so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 10%. The old machine has been fully depreciated and has no salvage value. What is the NPV of the project? Negative value, if any, should be indicated by a minus sign. Round your answer to the nearest cent. $    Should the old riveting machine be replaced by the new one? -Select-YesNoItem 2

please show clear expiation i want to do it by my self again and get the same result

Answer 1

Increase in operating cash flow (OCF) each year = increased income after tax + depreciation. This is because depreciation is a non-cash expense

The initial investment is the cost of new machine, which is $82,500

As the old machine is fully depreciated and has no salvage value, there are no incremental cash flows from disposing the old machine

The old machine should be replaced only if the NPV of the new machine is positive

NPV is calculated using NPV function in Excel. NPV is -$1,241.50

The old machine should not be replaced