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 $650 for 5 years and $335 for the sixth year. Its current book value is $3,585, and it can be sold on an Internet auction site for $4,175 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 $12,400, and has an estimated useful life of 6 years with an estimated salvage value of $1,300. 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 25%, and the project cost of capital is 13%.

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

$ ____

2. Should it replace the old steamer?

The old steamer [A. should; B. should not] be replaced.

Answer 1

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

$3682

2. Should it replace the old steamer?

The old steamer should be replaced. Since NPV is positive