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 $44,000 per year. The new machine will cost $80,000, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firm's WACC is 12%. 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.

Answer 1

		Initial Cash Flow
		Cost of new Machine	($80,000)
		Depreciation	$80,000
		Depreciation tax shield	$20,000	(80000*25%)
	I	Net Initial Cash Flow	($60,000)	(-80000+20000)
	Rate	Discount Rate =WACC	12%
	A	Increase in before tax earnings	$17,000	(44000-27000)
	Pmt=A*(1-0.25)	After tax annual cash flow	$12,750
	Nper	Number of years	8
	PV	Present Value of annual Cash Flow	$63,337.41	(Using PV function of excel with Rate=12%,Nper=8,Pmt=-12750)
	NPV=PV+I	Net Present Value (NPV)	$3,337.41	(63337.41-60000)