St. Johns River Shipyards\'s welding machine is 15 years old, fully depreciated,
ID: 2764749 • Letter: S
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 However, even though it is obsolete, it is perfectly functional as originally designed and can be used for quite a while longer.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 $82,500, 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 $58,000 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%.
Should the old welder be replaced by the new one? Old welder -(Select-should should) not be replaced?
What is the NPV of the project? Round your answer to the nearest cent.
Explanation / Answer
Calculate the NPV of the Project:
Year
Cash flows
Discounting
factor @ 14%
Discounted
Cash flows
0
$ (82,500)
1
$ (82,500.00)
1
$ 16,500
0.877193
$ 14,473.68
2
$ 26,400
0.769467
$ 20,313.93
3
$ 15,840
0.674972
$ 10,691.56
4
$ 9,504
0.59208
$ 5,627.13
5
$ 9,504
0.519369
$ 4,936.08
6
$ 4,752
0.455587
$ 2,164.95
NPV
$ (24,293)
Therefore, NPV is -$24,293.
The new machine should not replaced.
Year
Cash flows
Discounting
factor @ 14%
Discounted
Cash flows
0
$ (82,500)
1
$ (82,500.00)
1
$ 16,500
0.877193
$ 14,473.68
2
$ 26,400
0.769467
$ 20,313.93
3
$ 15,840
0.674972
$ 10,691.56
4
$ 9,504
0.59208
$ 5,627.13
5
$ 9,504
0.519369
$ 4,936.08
6
$ 4,752
0.455587
$ 2,164.95
NPV
$ (24,293)
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