The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $700 for 5 years and $350 for the sixth year. Its current book value is $3,850, and it can be sold on an Internet auction site for $4,420 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life. Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $12,000 and has an estimated useful life of 6 years with an estimated salvage value of $1,700. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20 %, 11.52 %, 11.52 %, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine's much greater efficiency would reduce operating expenses by $1,700 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal-plus-state tax rate is 25%, and the project cost of capital is What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. Should it replace the old steamer? The old steamer -Select- be replaced.
The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $700 for 5 years and $350 for the sixth year. Its current book value is $3,850, and it can be sold on an Internet auction site for $4,420 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life. Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $12,000 and has an estimated useful life of 6 years with an estimated salvage value of $1,700. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20 %, 11.52 %, 11.52 %, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine's much greater efficiency would reduce operating expenses by $1,700 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal-plus-state tax rate is 25%, and the project cost of capital is What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. Should it replace the old steamer? The old steamer -Select- be replaced.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 17P
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Transcribed Image Text:Replacement Analysis
The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life.
If kept, the steamer will have depreciation expenses of $700 for 5 years and $350 for the sixth year. Its current book value is $3,850, and it can be sold on an
Internet auction site for $4,420 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life.
Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $12,000 and has an estimated useful life of 6 years with an
estimated salvage value of $1,700. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00 %, 32.00 %, 19.20%,
11.52 %, 11.52 %, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine's much
greater efficiency would reduce operating expenses by $1,700 per year. To support the greater sales, the new machine would require that inventories increase
by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal-plus-state tax rate is 25%, and the project cost of capital is
14%
What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
$
Should it replace the old steamer?
The old steamer-Select-
be replaced.
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