# 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 19416.7 13697.9 10300.9 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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