Question

St. Johns River Shipyards' 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 $84,500 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 project cost of capital is 10%. Should the old welder be replaced by the new one?

What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

NPV: $ 21,660.

As the NPV is greater than zero, the old welder should be replaced by the new one.

Computation of NPV of the project :

	0	1	2	3	4	5	6	7	8
Initial Investment	(84,500)
Incremental EBITDA	0	25,000	25,000	25,000	25,000	25,000	25,000	25,000	25,000
Incremental Depreciation	0	16,900	27,040	16,224	9,734	9,735	4,867	0	0
Incremental Operating Cash Flows after Taxes*	0	21,760	25,816	21,490	18,894	18,894	16,947	15,000	15,000
PV factor at 10%	1.0000	0.9091	0.8264	0.7513	0.6830	0.6209	0.5645	0.5132	0.4665
Present Values	(84,500)	19,782	21,334	16,145	12,905	11,731	9,567	7,698	6998
Net Present Value	21,660

Operating cash flows after taxes = EBITDA x ( 1 - t ) + Depreciation x t.