Question

St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $27,000 to $56,000 per year. The new machine will cost $85,000, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firm's WACC is 18%. The old machine has been fully depreciated and has no salvage value.

What is the NPV of the project? Negative value, if any, should be indicated by a minus sign. Round your answer to the nearest cent.
$  

Should the old riveting machine be replaced by the new one?
-Select-Yes or No

Answer 1

Statement showing NPV

Particulars	0	1	2	3	4	5	6	7	8	NPV = Sum of PV
Cost of new Machine	-85000
Tax shield on depreciation (85000 x 100% x 25%)	21250
Incremental EBIT (56000-27000)		29000	29000	29000	29000	29000	29000	29000	29000
Less: tax @ 25%		-7250	-7250	-7250	-7250	-7250	-7250	-7250	-7250
PAT/Annual cah flow		21750	21750	21750	21750	21750	21750	21750	21750
Total cash flow	-63750	21750	21750	21750	21750	21750	21750	21750	21750
PVIF @ 18%	1	0.8475	0.7182	0.6086	0.5158	0.4371	0.3704	0.3139	0.2660
PV	-63750	18432	15621	13238	11218	9507	8057	6828	5786	24937

Thus NPV = $24937

Since NPV is positive  old riveting machine Should be replaced by the new one

Ans)

1) NPV = $24937

2) Should old riveting machine be replaced by the new one = Yes

answered by: anonymous