Question

Replacement analysis

Mississippi River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $24,000 to $48,000 per year. The new machine will cost $82,500, and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period; so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 18%. The old machine has been fully depreciated and has no salvage value.

What is the NPV of the project? Round your answer to the nearest cent.
$  

Should the old riveting machine be replaced by the new one?
-Select-

YesNo

Answer 1

Time line		0	1	2	3	4	5	6	7	8
Cost of new machine		-82500
=Initial Investment outlay		-82500
5 years MACR rate			20.00%	32.00%	19.20%	11.52%	11.52%	5.76%	0.00%	0.00%
Profits			24000	24000	24000	24000	24000	24000	24000	24000
-Depreciation	=Cost of machine*MACR%		-16500	-26400	-15840	-9504	-9504	-4752	0	0
=Pretax cash flows			7500	-2400	8160	14496	14496	19248	24000	24000
-taxes	=(Pretax cash flows)*(1-tax)		4500	-1440	4896	8697.6	8697.6	11548.8	14400	14400
+Depreciation			16500	26400	15840	9504	9504	4752	0	0
=after tax operating cash flow			21000	24960	20736	18201.6	18201.6	16300.8	14400	14400
+Tax shield on salvage book value	=Salvage value * tax rate									0
=Terminal year after tax cash flows										0
Total Cash flow for the period		-82500	21000	24960	20736	18201.6	18201.6	16300.8	14400	14400
Discount factor=	(1+discount rate)^corresponding period	1	1.18	1.3924	1.643032	1.9387778	2.2877578	2.6995542	3.185474	3.7588592
Discounted CF=	Cashflow/discount factor	-82500	17796.61	17925.88	12620.57	9388.1828	7956.0871	6038.3304	4520.52	3830.9496
NPV=	Sum of discounted CF=	-2422.87

Reject project as NPV is negative