Question

Q10

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 $24,000 to $48,000 per year. The new machine will cost $90,000, 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 16%. 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?

Answer 1

Time line		0	1	2	3	4	5	6	7	8
Cost of new machine		-90000
=Initial Investment outlay		-90000
5 years MACR rate			20.00%	32.00%	19.00%	12.00%	11.00%	6.00%	0.00%	0.00%	0.00%
Profits			24000	24000	24000	24000	24000	24000	24000	24000
-Depreciation	=Cost of machine*MACR%		-18000	-28800	-17100	-10800	-9900	-5400	0	0	0	=Salvage Value
=Pretax cash flows			6000	-4800	6900	13200	14100	18600	24000	24000
-taxes	=(Pretax cash flows)*(1-tax)		3600	-2880	4140	7920	8460	11160	14400	14400
+Depreciation			18000	28800	17100	10800	9900	5400	0	0
=after tax operating cash flow			21600	25920	21240	18720	18360	16560	14400	14400
+Tax shield on salvage book value	=Salvage value * tax rate									0
=Terminal year after tax cash flows										0
Total Cash flow for the period		-90000	21600	25920	21240	18720	18360	16560	14400	14400
Discount factor=	(1+discount rate)^corresponding period	1	1.16	1.3456	1.560896	1.8106394	2.1003417	2.4363963	2.826219734	3.2784149
Discounted CF=	Cashflow/discount factor	-90000	18620.69	19262.782	13607.569	10338.889	8741.435	6796.9237	5095.14523	4392.3666
NPV=	Sum of discounted CF=	-3144.2

Donot replace as incremental NPV is negative