Question

Q 10

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

Answer 1

NPV = present value of cash flows - initial investment

present value of cash flows = net cash flow/(1+WACC)^year

NPV is $109,464.05.

Yes, the old riveting machine should be replaced by the new one because new machine has a positive NPV.

	Years	0	1	2	3	4	5	6	7	8
	Initial cost	-$82,500	0	0	0	0	0	0	0	0
	earnings before depreciation	$0	$52,000	$52,000	$52,000	$52,000	$52,000	$52,000	$52,000	$52,000
Less:	Depreciation	$0	$16,500	$26,400	$15,675	$9,900	$9,075	$4,950	$0	$0
	Pre-tax cash flow	$0	$35,500	$25,600	$36,325	$42,100	$42,925	$47,050	$52,000	$52,000
Less:	Taxes @ 40%	$0	$14,200	$10,240	$14,530	$16,840	$17,170	$18,820	$20,800	$20,800
	After-tax cash flow	$0	$21,300	$15,360	$21,795	$25,260	$25,755	$28,230	$31,200	$31,200
Add back:	Depreciation	$0	$16,500	$26,400	$15,675	$9,900	$9,075	$4,950	$0	$0
	Net cash flow	-$82,500	$37,800	$41,760	$37,470	$35,160	$34,830	$33,180	$31,200	$31,200
	NPV	$109,464.05

Formulas and calculations