St. Johns River Shipyards\'s welding machine is 15 years old, fully depreciated,
ID: 2752054 • 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 However, even though it is obsolete, it is perfectly functional as originally designed and can be used for quite a while longer.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 $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 $25,000 to $50,000 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 13%. 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
Time line 0 1 2 3 4 5 6 7 8 Cost of equipment -84000 =Initial Investment outlay -84000 Increased earnings 50000 25000 25000 25000 25000 25000 25000 25000 MACR rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 0% 0% -Depreciation = Cost of equipment* MACR Rate -16800 -26880 -16128 -9676.8 -9676.8 -4838 0 0 = 33200 -1880 8872 15323.2 15323.2 20162 25000 25000 -taxes =(cost- depreciation)*(1-tax) 19920 -1128 5323.2 9193.92 9193.92 12097 15000 15000 +Depreciation 16800 26880 16128 9676.8 9676.8 4838.4 0 0 =after tax operating cash flow 36720 25752 21451.2 18870.72 18870.72 16935 15000 15000 Proceeds from sale of assets =salvage value*(1 - tax rate) 0 +reversal of net working capital 0 Terminal year non operating cash flows 0 WACC 13% Total Cash flow for the period -84000 36720 25752 21451.2 18870.72 18870.72 16935 15000 15000 Discount factor =(1+discount rate)^n 1 1.13 1.2769 1.442897 1.630474 1.842435 2.082 2.353 2.658 Discounted cash flows -84000 32495.58 20167.59 14866.76 11573.77 10242.27 8134.4 6376 5642 NPV= Sum of discounted cash flows 25498.64
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