REPLACEMENT ANALYSIS St. Johns
REPLACEMENT ANALYSIS St. Johns River Shipyards is consideringthe replacement of an 8-year-old riveting machine with a new onethat will increase earnings before depreciation from $27,000 to$56,000 per year. The new machine will cost $82,500, and it willhave an estimated life of 8 years and no salvage value. The newmachine will be depreciated over its 5-year MACRS recovery period,so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%,and 6%. The applicable corporate tax rate is 40%, and the firm’sWACC is 20%. The old machine has been fully depreciated and has nosalvage value.
What is the NPV of the project? Round your answer to the nearestcent. Negative amount should be indicated by a minus sign.
$
Should the old riveting machine be replaced by the new one? (YESor NO)
Answer:
|
Year |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
|
Increased earning before depreciation |
29000 |
29000 |
29000 |
29000 |
29000 |
29000 |
29000 |
29000 |
|
Depreciation |
16500 |
26400 |
15675 |
9900 |
9075 |
4950 |
0 |
0 |
|
Taxable Earnings |
12500 |
2600 |
13325 |
19100 |
19925 |
24050 |
29000 |
29000 |
|
Tax @ 40% |
5000 |
1040 |
5330 |
7640 |
7970 |
9620 |
11600 |
11600 |
|
Net Earnings |
7500 |
1560 |
7995 |
11460 |
11955 |
14430 |
17400 |
17400 |
|
Net Cash Flow |
24000 |
27960 |
23670 |
21360 |
21030 |
19380 |
17400 |
17400 |
|
Present Value Factor @ 20% |
0.833333 |
0.694444 |
0.578704 |
0.482253 |
0.401878 |
0.334898 |
0.279082 |
0.232568 |
|
Present Value |
20000 |
19416.67 |
13697.92 |
10300.93 |
8451.49 |
6490.32 |
4856.02 |
4046.68 |
NPV = -82500 + 20000 + 19416.67 + 13697.92 + 10300.93 + 8451.49+ 6490.32 + 4856.02 + 4046.68
NPV = $4760.03
Since, NPV of replacement is positive at WACC of 20%,replacement should be considered.
Yes, old riveting machine should be replaced by new one.
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