Question

Replacement Analysis St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has...

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?

 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

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