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 $183,500 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 $82,000 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? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign.

The NPV of the project is $  

Old welder -Select-shouldshould notItem 2 be replaced.

Answer 1

	0	1	2	3	4	5	6	7	8	Net present value
Initial cost	-183500
Increase in earning before depreciation [82000-26000]		56000	56000	56000	56000	56000	56000	56000	56000
Less:Depreciation		-36700 [183500*.20]	-58720 [183500*.32]	-35232 [183500*.192]	-21139.2 [183500*.1152]	-21139.2	-10569.6 [183500*.0576]	0	0
Income before tax		19300	-2720	20768	34860.8	34860.8	45430.4	56000	56000
less:Taxes [Income before tax*tax rate]		-7720 [19300*.40]	1088	8307.2	13944.32	13944.32	18172.16	22400	22400
Net Income		11580	-1632	12460.8	20916.48	20916.48	27258.24	33600	33600
Add:depreciation		36700	58720	35232	21139.2	21139.2	10569.6	0	0
Cash Flow	-183500	48280	57088	47692.8	42055.68	42055.68	37827.84	33600	33600
Present value factor at 13%	1	.88496	.78315	.69305	.61332	.54276	.48032	.42506	.37616
Present value of cash flow [cash flow present value factor]	-183500	42725.87	44708.47	33053.50	25793.59	22826.14	18169.47	14282.02	12638.98	30698.02

Net present value = 30698.02

since NPV is positive old welder should be replaced .

**Find present value factor using the formula 1/(1+i)^n where i= 13% and n=1,2,3,4,5,6,7,8