Question

12.

St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $30,000 to $46,000 per year. The new machine will cost $80,000, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firm's WACC is 12%. The old machine has been fully depreciated and has no salvage value.

What is the NPV of the project? Negative value, if any, should be indicated by a minus sign. Round your answer to the nearest cent.

Answer 1

Based on the given data, pls find below workings: Depreciation at 100% considered during Year 1 - Year of service.

The NPV is -ve $ 2531.18 or $ 2531 (rounded off)

1 2 3 4 5 6 7 8 Riveting Machine ($) Initial Cost 0 80,000 16,000 16,000 16,000 16,000 16,000 16,000 16,000 EBIDT Increase Depreciation EBIT Tax @ 25% Net Income 16,000 80,000 -64,000 -16,000 -48,000 16,000 4,000 12,000 16,000 4,000 12,000 16,000 4,000 12,000 16,000 4,000 12,000 16,000 4,000 12,000 16,000 4,000 12,000 16,000 4,000 12,000 Total Cash Flows Discount Factor Discounted Cash Flows NPV -80,000 1.0000 -80,000 -2,531.18 32,000 0.8929 28,571 12,000 0.7972 9,566 12,000 0.7118 8,541 12,000 0.6355 7,626 12,000 0.5674 6,809 12,000 0.5066 6,080 12,000 0.4523 5,428 12,000 0.4039 4,847 100% depreciation considerd in the Year of Service - Year 1