St. Johns River Shipyard\'s welding machine is 15 years old, fully depreciated,
ID: 2498390 • Letter: S
Question
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 $84,000 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 14%. Should the old welder be replaced by the new one?
What is the NPV of the project? Round your answer to the nearest cent.
Explanation / Answer
Amount (in $) Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Total Annual Additional Cash Inflow 27000.00 27000.00 27000.00 27000.00 27000.00 27000.00 27000.00 27000.00 216000.00 Less: Depreciation 16800.00 26880.00 16128.00 9676.80 9676.80 4838.40 0.00 0.00 84000.00 Cash Inflow after depreciation 10200.00 120.00 10872.00 17323.20 17323.20 22161.60 27000.00 27000.00 132000.00 Less: Tax @ 40% 4080.00 48.00 4348.80 6929.28 6929.28 8864.64 10800.00 10800.00 52800.00 Cash Inflow after depreciation & tax 6120.00 72.00 6523.20 10393.92 10393.92 13296.96 16200.00 16200.00 79200.00 Add: Depreciation 16800.00 26880.00 16128.00 9676.80 9676.80 4838.40 0.00 0.00 84000.00 Cash Accrual 22920.00 26952.00 22651.20 20070.72 20070.72 18135.36 16200.00 16200.00 163200.00 Present Value of Cash Accrual 20105.26 20738.69 15288.91 11883.48 10424.10 8262.23 6474.12 5679.06 98855.85 Less: Cost of new welder 84000.00 NPV of the project 14855.85 Since NPV of the project is positive the welder should be replaced.
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