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 $84,500 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 $26,000 to $52,000 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?

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

Answer 1

NPV =

$14,747.87

Operating cash flows as below

OCF		MACRS 5 year
Year	EBITDA	Depreciation	EBIT	Tax	PAT	OCF
1	26000	-16900	9100	-3640	5460	22360
2	26000	-27040	-1040	416	-624	26416
3	26000	-16224	9776	-3910.4	5865.6	22089.6
4	26000	-9734.4	16265.6	-6506.24	9759.36	19493.76
5	26000	-9734.4	16265.6	-6506.24	9759.36	19493.76
6	26000	-4867.2	21132.8	-8453.12	12679.68	17546.88
7	26000	0	26000	-10400	15600	15600
8	26000	0	26000	-10400	15600	15600

Net Cash flows andNPV

Year	Initial cash flow	OCF	Net cash flows
0	-84500		-84500
1		$22,360.00	22360
2		$26,416.00	26416
3		$22,089.60	22089.6
4		$19,493.76	19493.76
5		$19,493.76	19493.76
6		$17,546.88	17546.88
7		$15,600.00	15600
8		$15,600.00	15600
		NPV	$14,747.87

WORKINGS