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 However, even though it is obsolete, it is perfectly functional as originally designed and can be used for quite a while longer.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 $81,000, 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 $26,000 to $52,000 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 12%. Should the old welder be replaced by the new one?

1)Old welder should be or should not be replaced?

2)What is the NPV of the project? Round your answer to the nearest cent.

Explanation / Answer

The annual cash flow for the old machine will be 26,000*(1-0.4) = 15,600 per year.

The NPV for the old machine is given as below

NPV of the Old machine is : 77,495.18

The annual cash flows and the NPV for the new machine is given below:

NPV fot the new machine is $96,959.19

1.Hence the old welder should be repalced.

2. The NPV of the new project is $96,959.19 as shown the second table

Year 1 2 3 4 5 6 7 8 Cash flow 15600 15600 15600 15600 15600 15600 15600 15600 NPV $               77,495.18

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