St. Johns River Shipyards\'s welding machine is 15 years old, fully depreciated,
ID: 2647587 • Letter: S
Question
St. Johns River Shipyards's welding machine is 15 years old, fully depreciated, obsolete, and has no salvage value. However, even though it is obsolete, it is perfectly functional as originally designed and can be used for quite a while longer. The new welder will cost $80,500, 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 $28,000 to $56,000 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 -Select-should or should not be replaced?
What is the NPV of the project? Round your answer to the nearest cent.
Explanation / Answer
New Wender Year 1 Year 2 Year 3 Year 4 Year 5 Total Earnings 56000 56000 56000 56000 56000 Post Tax Earnings(A) 33600 33600 33600 33600 33600 Depreciation -16100 -25760 -15456 -9273.6 -9273.6 Tax savings on depreciation[B] 6440 10304 6182.4 3709.44 3709.44 Cash Flows(C=A+B) 40040 43904 39782.4 37309.44 37309.44 Discounting rate@14% 0.8772 0.7695 0.675 0.5921 0.5194 Discounted Cash Flow 35123.088 33784.128 26853.12 22090.92 19378.52 137229.8 Less:Initial investment -80500 Net Present Value 56729.78 Old Wender Earnings 28000 28000 28000 28000 28000 Post Tax Earnings 16800 16800 16800 16800 16800 Discounting rate@14% 0.8772 0.7695 0.675 0.5921 0.5194 Net Present Value 14736.96 12927.6 11340 9947.28 8725.92 57677.76 Conclusion:- Comparing the above NPV, it can be seen that purchase of new wender leads to lower present value. Hence the purchase is not advisable
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