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Replacement Analysis St, Johns River Shipyard's welding machine is 15 years old, fully depreciated, and has no salvage value
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 $80,000 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 $27,000 to $54,000 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 15%. Should the old welder be replaced by the new one?
What is the NPV of the project? Round your answer to the nearest cent.
$ _____________
Expert Solution
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Time line 0 1 2 3 4 5 6 7 8 Cost of new machine -80000 =Initial Investment outlay -80000 5 years MACR rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 0.00% 0.00% 0.00% Profits 27000 27000 27000 27000 27000 27000 27000 27000 -Depreciation =Cost of machine*MACR% -16000 -25600 -15360 -9216 -9216 -4608 0 0 0 =Salvage Value =Pretax cash flows 11000 1400 11640 17784 17784 22392 27000 27000 -taxes =(Pretax cash flows)*(1-tax) 6600 840 6984 10670.4 10670.4 13435.2 16200 16200 +Depreciation 16000 25600 15360 9216 9216 4608 0 0 =after tax operating cash flow 22600 26440 22344 19886.4 19886.4 18043.2 16200 16200 +Tax shield on salvage book value =Salvage value * tax rate 0 =Terminal year after tax cash flows 0 Total Cash flow for the period -80000 22600 26440 22344 19886.4 19886.4 18043.2 16200 16200 Discount factor= (1+discount rate)^corresponding period 1 1.15 1.3225 1.520875 1.7490063 2.0113572 2.3130608 2.66001988 3.0590229 Discounted CF= Cashflow/discount factor -80000 19652.17391 19992.43856 14691.5427 11370.114 9887.0554 7800.5733 6090.180047 5295.8087 NPV= Sum of discounted CF= 14779.89 Replace as NPV is positive
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