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St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage...

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 $83,500 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 project cost of capital is 14%. Should the old welder be replaced by the new one? What is the NPV of the project? Please help it's urgent!

Anyone please am getting answer in negative so please i need your help!

Solutions

Expert Solution

Time line 0 1 2 3 4 5 6 7 8
Cost of new machine -83500
=Initial Investment outlay -83500
5 years MACR rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 0.00% 0.00%
Profits 29000 29000 29000 29000 29000 29000 29000 29000
-Depreciation =Cost of machine*MACR% -16700 -26720 -16032 -9619.2 -9619.2 -4809.6 0 0
=Pretax cash flows 12300 2280 12968 19380.8 19380.8 24190.4 29000 29000
-taxes =(Pretax cash flows)*(1-tax) 7380 1368 7780.8 11628.48 11628.48 14514.24 17400 17400
+Depreciation 16700 26720 16032 9619.2 9619.2 4809.6 0 0
=after tax operating cash flow 24080 28088 23812.8 21247.68 21247.68 19323.84 17400 17400
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
Total Cash flow for the period -83500 24080 28088 23812.8 21247.68 21247.68 19323.84 17400 17400
Discount factor= (1+discount rate)^corresponding period 1 1.14 1.2996 1.481544 1.6889602 1.9254146 2.1949726 2.502269 2.8525864
Discounted CF= Cashflow/discount factor -83500 21122.81 21612.8 16072.962 12580.332 11035.379 8803.6816 6953.689 6099.7276
NPV= Sum of discounted CF= 20781.38265

Accept replacement as NPV is positive

jeff jeffy answered 1 year ago
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