Galveston shipyards is considering the replacement of an eight year old riveting
ID: 2650678 • Letter: G
Question
Galveston shipyards is considering the replacement of an eight year old riveting machine with a new one what will increase earnings before depreciation and taxes from 27,000 54,000 per year. the new machine will cost 82000 and will have an estimated life of 8 years and no salvage value. the new machine will be depreciated over its 5 years MACRS revovery period. the firm's marginal tax rate is 40% and the required rate of return is 12%. the old machines is fully depreciated and there is not salvage value. should the old riveting machine be replaced by the new one? PLEASE SHOW ME ALL THE WORK TO SOLVE THIS!
Explanation / Answer
Galvestton Shipyards
Calculation of Net Present Value of New Machine
Year
Incremental EBDT
Depreciation
EBT
EAT
Cash Flow (EAT + Depreciation)
PVIF @ 12 %
Present Value of Cash Flow
1
27,000
16,400
10,600
6360
22760
0.893
20321
2
27,000
26,240
760
456
26696
.797
21282
3
27,000
15,744
11,256
6753.60
22497.6
0.712
16013
4
27,000
9446
17,554
10532.4
19978.4
0.636
12697
5
27,000
9446
17,554
10532.4
19978.4
0.567
11336
6
27,000
4724
22,276
13365.6
18089.6
0.507
9165
7
27,000
27,000
16200
16200
0.452
7328
8
27,000
27,000
16200
16200
0.404
6543
Total
104685
Incremental NPV= Present value of cash inflow- Initial Investment
Incremental NPV= 104685-82000
Incremental NPV= $ 22685
As new machine will generate incremental NPV of $ 22,685 hence old machine should be replaced with new one.
WN -1 Depreciation
Year
Initial Cost
Rate
Depreciation
1
82,000
20 %
16400
2
82,000
32 %
26240
3
82,000
19.2 %
15744
4
82,000
11.52 %
9446
5
82,000
11.52%
9446
6
82,000
5.76 %
4724
Depreciation= Cost x Rate
Year
Incremental EBDT
Depreciation
EBT
EAT
Cash Flow (EAT + Depreciation)
PVIF @ 12 %
Present Value of Cash Flow
1
27,000
16,400
10,600
6360
22760
0.893
20321
2
27,000
26,240
760
456
26696
.797
21282
3
27,000
15,744
11,256
6753.60
22497.6
0.712
16013
4
27,000
9446
17,554
10532.4
19978.4
0.636
12697
5
27,000
9446
17,554
10532.4
19978.4
0.567
11336
6
27,000
4724
22,276
13365.6
18089.6
0.507
9165
7
27,000
27,000
16200
16200
0.452
7328
8
27,000
27,000
16200
16200
0.404
6543
Total
104685
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