Question

REPLACEMENT ANALYSIS 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 $52,000 per year. The new machine will cost $82,500, and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 16%. The old machine has been fully depreciated and has no salvage value. What is the NPV of the project? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. $ ________ Should the old riveting machine be replaced by the new one? _________________

Answer 1

Year	EBD	dep	ibt	iat *(1-0.4)	cash flow	dis 16%	PV
0	-82500				-82500	1	-82500
1	52000	16500	35500	21300	37800	0.862	32583.6
2	52000	26400	25600	15360	41760	0.743	31027.68
3	52000	15675	36325	21795	37470	0.641	24018.27
4	52000	9900	42100	25260	35160	0.552	19408.32
5	52000	9075	42925	25755	34830	0.476	16579.08
6	52000	4950	47050	28230	33180	0.41	13603.8
7	52000		52000	31200	31200	0.354	11044.8
8	52000		52000	31200	31200	0.305	9516
						NPV	=$75281.55

Yes, the old riveting machine should be replaced by the new machine being NPV is positive at $75281.55..