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 $83,000 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 10%. 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

Operating cash flow (OCF) each year = incremental income after tax + depreciation

incremental income before tax = $52,000 - $26,000 =  $26,000

NPV is calculated using NPV function in Excel

NPV is $25,897.09