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Replacement Analysis St. Johns River Shipyard's welding machine is 15 years old, fully depreciated, and has...

Replacement Analysis St. Johns River Shipyard's 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 $84,500 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 $29,000 to $58,000 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 firm's WACC is 14%. Should the old welder be replaced by the new one? Old welder be replaced. What is the NPV of the project? Round your answer to the nearest cent.

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Expert Solution

Annual Operating cashflows
Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8
Incremental revenue 29000 29000 29000 29000 29000 29000 29000 29000
Less: Depreciation 16900 27040 16224 9734.4 9734.4 4867.2
Before tax Income 12100 1960 12776 19265.6 19265.6 24132.8 29000 29000
Less: tax @ 40% 4840 784 5110.4 7706.24 7706.24 9653.12 11600 11600
After tax Income 7260 1176 7665.6 11559.36 11559.36 14479.68 17400 17400
Add: Dep 16900 27040 16224 9734.4 9734.4 4867.2 0 0
Annual operating cashflows 24160 28216 23889.6 21293.76 21293.76 19346.88 17400 17400
PVF at 14% 0.877193 0.769468 0.674972 0.59208 0.519369 0.455587 0.399637 0.350559
Present value of CF 21192.982 21711.3 16124.8 12607.62 11059.31 8814.178 6953.689 6099.728
Total Present value of Cf 104563.6
Less: Initial Investment 84500
NPV 20063.6
Yes, machine shall be replaced

jeff jeffy answered 1 year ago
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