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 $181,500 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 $28,000 to $73, 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 10%. 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.

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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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, 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 $28,000 to $73, 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 10%. 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.
F1
Inflation Adjustments
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of $165,000. The project will produce 700 cases of mineral water per year indefinitely, starting at Year 1.
The Year-1 sales price will be $150 per case, and the Year-1 cost per case will be $120. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only
equity, and it has a cost of capital of 14%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated.
a. What is the present value of future cash flows? (Hint: The project is a growing perpetulty, so you must use the constant growth formula to find its NPV.) What is the NPV? Do not round intermediate calculations. Round your answers to
the nearest dollar. Negative values, if any, should be indicated by a minus sign.
PV of future CFs: $
NPV:
$
b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the project's NPV? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if
any, should be indicated by a minus sign.
$
Transcribed Image Text: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, 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 $28,000 to $73, 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 10%. 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. F1 Inflation Adjustments The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of $165,000. The project will produce 700 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be $150 per case, and the Year-1 cost per case will be $120. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 14%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetulty, so you must use the constant growth formula to find its NPV.) What is the NPV? Do not round intermediate calculations. Round your answers to the nearest dollar. Negative values, if any, should be indicated by a minus sign. PV of future CFs: $ NPV: $ b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the project's NPV? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign. $
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