Question

REPLACEMENT ANALYSIS 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 $56,000 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 20%. The old machine has been fully depreciated and has no salvage value.

What is the NPV of the project? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.

$

Should the old riveting machine be replaced by the new one? (YES or NO)

Answer 1

Year	1	2	3	4	5	6	7	8
Increased earning before depreciation	29000	29000	29000	29000	29000	29000	29000	29000
Depreciation	16500	26400	15675	9900	9075	4950	0	0
Taxable Earnings	12500	2600	13325	19100	19925	24050	29000	29000
Tax @ 40%	5000	1040	5330	7640	7970	9620	11600	11600
Net Earnings	7500	1560	7995	11460	11955	14430	17400	17400
Net Cash Flow	24000	27960	23670	21360	21030	19380	17400	17400
Present Value Factor @ 20%	0.833333	0.694444	0.578704	0.482253	0.401878	0.334898	0.279082	0.232568
Present Value	20000	19416.67	13697.92	10300.93	8451.49	6490.32	4856.02	4046.68

NPV = -82500 + 20000 + 19416.67 + 13697.92 + 10300.93 + 8451.49 + 6490.32 + 4856.02 + 4046.68

NPV = $4760.03

Since, NPV of replacement is positive at WACC of 20%, replacement should be considered.

Yes, old riveting machine should be replaced by new one.