Question

Problem 11-09
Replacement Analysis

The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $350 for 6 years. Its current book value is $2,100, and it can be sold on an Internet auction site for $4,500 at this time. Thus, the annual depreciation expense is $2,100/6=$350 per year. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life.

Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $8,100, and has an estimated useful life of 6 years with an estimated salvage value of $900. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine's much greater efficiency would reduce operating expenses by $1,500 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal-plus-state tax rate is 40%, and the project cost of capital is 14%. Should it replace the old steamer?

The old steamer (-Select-should/should not) be replaced.

What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
$

Answer 1

Annual Cash inflows
			Year1	Year2	Year3	Year4	Year5	Year 6
Increase in sales			2000	2000	2000	2000	2000	2000
Saving I operating expense			1500	1500	1500	1500	1500	1500
Cash inflows			3500	3500	3500	3500	3500	3500
Annual Depreciation on new steamer			1440	2304	1383	829	829	415
Less: Depreciation on old			350	350	350	350	350	350
Incremental depreciation			-1090	-1954	-1033	-479	-479	-65
Net income			2410	1546	2467	3021	3021	3435
Less: Tax rate @40%			964	618	987	1208	1208	1374
Net Income after tax			1446	928	1480	1813	1813	2061
Add: Depreciation			850	850	850	850	850	850
Annual Cash inflows			2296	1778	2330	2663	2663	2911
NPV:
			Year0	Year1	Year2	Year3	Year4	Year5	Year 6
Initial Investment			-8100
Workking capital requirement			-2200
Terminal value of Salvae value of old			1440
Annual inflows				2296	1778	2330	2663	2663	2911
Incremental Salvage value of new steamer									100
(900-800)
Working capital release									2200
Net cash flows			-8860	2296	1778	2330	2663	2663	5211
PVF @ 14%			1	0.877193	0.769468	0.674972	0.59208	0.519369	0.455587
Present value			-8860	2014.035	1368.113	1572.684	1576.71	1383.079	2374.061
NPV			1429