St. Johns River Shipyards\'s welding machine is 15 years old, fully depreciated,

Question

St. Johns River Shipyards's welding machine is 15 years old, fully depreciated, obsolete, and has no salvage value. However, even though it is obsolete, it is perfectly functional as originally designed and can be used for quite a while longer. The new welder will cost $84,500, 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 $28,000 to $56,000 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 firm's WACC is 14%. What is the NPV of the project? Round your answer to the nearest cent.

Explanation / Answer

Working:

Calculation of NPV of project: Year 1 2 3 4 5 6 7 8 Total Earning before depreciation 56000 56000 56000 56000 56000 56000 56000 56000 Less: Depreciation 16,900 27,040 16,224 9,734 9,734 4,867 0 0 Earning after depreciation 39,100 28,960 39,776 46,266 46,266 51,133 56,000 56,000 Less: Tax @40% 15,640 11,584 15,910 18,506 18,506 20,453 22,400 22,400 Earning after tax 23,460 17,376 23,866 27,759 27,759 30,680 33,600 33,600 Add: Depreciation 16,900 27,040 16,224 9,734 9,734 4,867 0 0 Cash flow 40,360 44,416 40,090 37,494 37,494 35,547 33,600 33,600 Discount factor (14%) 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 Present value 35403.51 34176.67 27059.34 22199.32 19473.08 16194.68 13427.81 11778.78    179,713.20 Less: Initial outlay      84,500.00 NPV      95,213.20 Thus, NPV of the project is $ 95.213.20

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