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 should be replaced.
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 should be replaced.
Chapter11: Long-term Assets
Section: Chapter Questions
Problem 13PB: Montezuma Inc. purchases a delivery truck for $20,000. The truck has a salvage value of $8,000 and...
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Transcribed Image Text:Problem 11-09 (Replacement Analysis)
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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 $345 for the sixth year. Its current book value is $3,845, and it can be sold on an Internet
auction site for $4,455 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 $12,200, and has an estimated useful life of 6 years with an estimated
salvage value of $1,400. 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 $1,600 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 13%.
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 should
be replaced.
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