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St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage...

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Finance

St. Johns River Shipyards' welding machine is 15 years old,fully depreciated, and has no salvage value. However, even thoughit is old, it is still functional as originally designed and can beused for quite a while longer. The new welder will cost $80,000 andhave an estimated life of 8 years with no salvage value. The newwelder will be much more efficient, however, and this enhancedefficiency will increase earnings before depreciation from $29,000to $58,000 per year. The new machine will be depreciated over its5-year MACRS recovery period, so the applicable depreciation ratesare 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Theapplicable corporate tax rate is 40%, and the project cost ofcapital is 10%. Should the old welder be replaced by the newone?

What is the NPV of the project? Do not round intermediatecalculations. Round your answer to the nearest cent.

Answer & Explanation Solved by verified expert
3.9 Ratings (649 Votes)

Time line 0 1 2 3 4 5 6 7 8
Cost of new machine -80000
=Initial Investment outlay -80000
5 years MACR rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 0.00% 0.00%
Profits 29000 29000 29000 29000 29000 29000 29000 29000
-Depreciation =Cost of machine*MACR% -16000 -25600 -15360 -9216 -9216 -4608 0 0
=Pretax cash flows 13000 3400 13640 19784 19784 24392 29000 29000
-taxes =(Pretax cash flows)*(1-tax) 7800 2040 8184 11870.4 11870.4 14635.2 17400 17400
+Depreciation 16000 25600 15360 9216 9216 4608 0 0
=after tax operating cash flow 23800 27640 23544 21086.4 21086.4 19243.2 17400 17400
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
Total Cash flow for the period -80000 23800 27640 23544 21086.4 21086.4 19243.2 17400 17400
Discount factor= (1+discount rate)^corresponding period 1 1.1 1.21 1.331 1.4641 1.61051 1.771561 1.9487171 2.1435888
Discounted CF= Cashflow/discount factor -80000 21636.36364 22842.975 17688.956 14402.295 13092.995 10862.285 8928.951257 8117.2284
NPV= Sum of discounted CF= 37572.05

Replace welder as incremental NPV is positive
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