Question

St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. The new welder will cost $182,000 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $28,000 to $69,500 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 40%, and the project cost of capital is 11%. Should the old welder be replaced by the new one? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign.

The NPV of the project is $  

Old welder -Select-shouldshould notItem 2 be replaced.

Answer 1

Calculation of NPV of the Project
Particulars	0	1	2	3	4	5	6	7	8
Initial Investment
Cost of New Welder (A)	-182000
Operating Cash Flows
Depreciation Rates (B)		20%	32%	19.20%	11.52%	11.52%	5.76%
Increase in Earnings (C) $69,500 - $28,000		41500	41500	41500	41500	41500	41500	41500	41500
Depreciation (D = $182,000 * B)		36400	58240	34944	20966.4	20966.4	10483.2	0	0
Profit Before Tax (E = C-D)		5100	-16740	6556	20533.6	20533.6	31016.8	41500	41500
Tax @40% (F = E*40%)		2040	-6696	2622.4	8213.44	8213.44	12406.72	16600	16600
Profit After Tax (G = E-F)		3060	-10044	3933.6	12320.16	12320.16	18610.08	24900	24900
Add back Depreciation (H = D)		36400	58240	34944	20966.4	20966.4	10483.2	0	0
Net Operating Cash Flows (I = G+H)		39460	48196	38877.6	33286.56	33286.56	29093.28	24900	24900
Total Cash Flows (J = A+I)	-182000	39460	48196	38877.6	33286.56	33286.56	29093.28	24900	24900
Discount Factor @11% (K) 1/(1+11%)^n n=0,1,2,3,4,5,6,7,8	1	0.900900901	0.811622433	0.731191381	0.658730974	0.593451328	0.53464084	0.481658411	0.433926496
Discounted Cash Flows (L = J*K)	-182000	35549.54955	39116.95479	28426.96605	21926.88809	19753.95324	15554.4555	11993.29443	10804.76976
Net Present Value	1126.831454
The NPV of the project is $1,126.83
Old welder should be replace since NPV>0