Question

Problem 11-10
Replacement Analysis

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 $80,000 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 $25,000 to $50,000 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 13%. Should the old welder be replaced by the new one?

Old welder -Select-shouldshould notItem 1 be replaced.

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

Answer 1

			Now	Year1	YEar2	Year3	YEar4	YEar5	YEar6	YEar7	YEar8
Annual savings in cost				25000	25000	25000	25000	25000	25000	25000	25000
Less: Depreciation				16000	25600	15360	9216	9216	4608
(Cost of Assets*MACRS rate)
Net income before tax				9000	-600	9640	15784	15784	20392	25000	25000
Less: tax@ 40%				3600	-240	3856	6313.6	6313.6	8156.8	10000	10000
Net income after tax				5400	-360	5784	9470.4	9470.4	12235.2	15000	15000
Add: Depreciation				16000	25600	15360	9216	9216	4608
Annual cash inflows				21400	25240	21144	18686.4	18686.4	16843.2	15000	15000
Initial Investment			-80000
Discount factor @ 13%			1	0.884956	0.783147	0.69305	0.613319	0.54276	0.480319	0.425061	0.37616
Present value of cashflows			-80000	18938.05	19766.62	14653.85	11460.72	10142.23	8090.101	6375.91	5642.398
Net Present value			15070
Hence, Old welder machine shall be replaced.