13-9: Replacement Analysis Problem 13-10 Replacement Analysis St. Johns River Sh

Question

13-9: Replacement Analysis Problem 13-10 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 $83,500 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 $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 11%. Should the old welder be replaced by the new one? Old welder be replaced. What is the NPV of the project? Round your answer to the nearest cent. $

Explanation / Answer

Tax rate 40% Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Additional Revenue                25,000          25,000                  25,000           25,000                  25,000           25,000           25,000      25,000 Less: Fixed Cost Less: Depreciation as per table given below                16,700          26,720                  16,032              9,619                    9,619              4,810                -   Profit before tax                  8,300          (1,720)                    8,968           15,381                  15,381           20,190           25,000      25,000 Tax                  3,320             (688)                    3,587              6,152                    6,152              8,076           10,000      10,000 Profit After Tax                  4,980          (1,032)                    5,381              9,228                    9,228           12,114           15,000      15,000 Add Depreciation                16,700          26,720                  16,032              9,619                    9,619              4,810                     -                  -   Cash Profit After tax                21,680          25,688                  21,413           18,848                  18,848           16,924           15,000      15,000 Depreciation Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Total Cost                83,500          83,500                  83,500           83,500                  83,500           83,500 Dep Rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Deprecaition                16,700          26,720                  16,032              9,619                    9,619              4,810           83,500         Calculation of NPV Year Captial Operating cash Annual Cash flow PV factor @ 11% Present values 0              (83,500)               (83,500) 1.000               (83,500) 1          21,680                  21,680 0.901                  19,532 2          25,688                  25,688 0.812                  20,849 3          21,413                  21,413 0.731                  15,657 4          18,848                  18,848 0.659                  12,416 5          18,848                  18,848 0.593                  11,185 6          16,924                  16,924 0.535                    9,048 7          15,000                  15,000 0.482                    7,225 8          15,000                  15,000 0.434                    6,509 Net Present Value                  (3,862)

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