Question

Replacement Analysis

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 $182,500 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 $29,000 to $84,500 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 12%. Should the old welder be replaced by the new one? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign.

The NPV of the project is $  

Should the old welder be replaced?

Answer 1

NPV = Present value of cash inflows - Present value of cash outflows
Year	0	1	2	3	4	5	6	7	8
Cost of Welder	-182500
Increase in Earnings		55500	55500	55500	55500	55500	55500	55500	55500
Less: Increase in Depreciation		36500	58400	35040	21024	21024	10512
Increase in Earnings before tax		19000	-2900	20460	34476	34476	44988	55500	55500
Less: Tax		7600	-1160	8184	13790.4	13790.4	17995.2	22200	22200
Increase in Net Income		11400	-1740	12276	20685.6	20685.6	26992.8	33300	33300
Add: Depreciation		36500	58400	35040	21024	21024	10512
Net Cash flows	-182500	47900	56660	47316	41709.6	41709.6	37504.8	33300	33300
PVF	1	0.892857	0.797194	0.71178	0.635518	0.567427	0.506631	0.452349	0.403883
PV of cash flows	-182500	42767.86	45169.01	33678.59	26507.2	23667.15	19001.1	15063.23	13449.31
NPV	36,803.45

Yes, should be replaced as NPV is positive