Question

# REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with...

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? _________________

 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..

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