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Replacement Analysis St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $181,000 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 $27,000 to $81,500 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 25%, and the project cost of capital is 11%. What is the NPV if the firm replaces the old welder with the new one? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign. DE FOR

Replacement Analysis St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $181,000 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 $27,000 to $81,500 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 25%, and the project cost of capital is 11%. What is the NPV if the firm replaces the old welder with the new one? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign. DE FOR

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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**Replacement Analysis** St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $181,000 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 $27,000 to $81,500 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 25%, and the project cost of capital is 11%. What is the NPV if the firm replaces the old welder with the new one? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign. _$25,588_ **Explanation of Calculation Process:** 1. **Cost of New Equipment:** $181,000 2. **Incremental Earnings Increase:** From $27,000 to $81,500 3. **Depreciation Rates:** Over 5 years, the rates are applied as follows: - Year 1: 20.00% - Year 2: 32.00% - Year 3: 19.20% - Year 4: 11.52% - Year 5: 11.52% - Year 6: 5.76% 4. **Corporate Tax Rate:** 25% 5. **Project Cost of Capital:** 11% 6. **Net Present Value (NPV):** The NPV calculated here assumes the cash flow changes due to the purchase of the new welder are considered, including tax savings from depreciation and increased earnings. Note: The NPV calculation involves determining after-tax cash flows, applying the cost of capital to discount future cash flows, and assessing the overall value added by this investment. The final NPV result is provided, indicating a positive value of $25,588, suggesting this investment would add value to the company.
Transcribed Image Text:**Replacement Analysis** St. Johns River Shipyards' welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $181,000 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 $27,000 to $81,500 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 25%, and the project cost of capital is 11%. What is the NPV if the firm replaces the old welder with the new one? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign. _$25,588_ **Explanation of Calculation Process:** 1. **Cost of New Equipment:** $181,000 2. **Incremental Earnings Increase:** From $27,000 to $81,500 3. **Depreciation Rates:** Over 5 years, the rates are applied as follows: - Year 1: 20.00% - Year 2: 32.00% - Year 3: 19.20% - Year 4: 11.52% - Year 5: 11.52% - Year 6: 5.76% 4. **Corporate Tax Rate:** 25% 5. **Project Cost of Capital:** 11% 6. **Net Present Value (NPV):** The NPV calculated here assumes the cash flow changes due to the purchase of the new welder are considered, including tax savings from depreciation and increased earnings. Note: The NPV calculation involves determining after-tax cash flows, applying the cost of capital to discount future cash flows, and assessing the overall value added by this investment. The final NPV result is provided, indicating a positive value of $25,588, suggesting this investment would add value to the company.
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