Question

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 $550 for 5 years and $305 for the sixth year. Its current book value is $3,055, and it can be sold on an Internet auction site for $3,705 at this time. 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 $11,600, and has an estimated useful life of 6 years with an estimated salvage value of $1,700. 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 $1,800 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 12%.

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

Should it replace the old steamer?

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

Answer 1

What is the NPV of the project? $2977

Should it replace the old steamer?

The old steamer should be replaced since NPV is positive.