The expected interest rate for year 2, yield, expected inflation rate during year 2 and the reason of the difference between the average interest rate during 2-year period and 1-year period for the year 2. Introduction: Expectation Theory: Expectation theory estimates the future interest without taking into consideration of maturity risk. According to the expectation theory, the yield curve of investment is totally depending upon the future expectation of investors.

Question

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 $78,500 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 13%. 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.

Answer 1

Question

Chapter 6, Problem 15P

Summary Introduction

To analyze: The expected interest rate for year 2, yield, expected inflation rate during year 2 and the reason of the difference between the average interest rate during 2-year period and 1-year period for the year 2.

Introduction:

Expectation Theory:

Expectation theory estimates the future interest without taking into consideration of maturity risk. According to the expectation theory, the yield curve of investment is totally depending upon the future expectation of investors.

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Students have asked these similar questions

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 $78,500 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 13%. 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.

Ends Apr 27 Explain why we start with Sales forecasts when we do our financial forecasting. What are the limitations of the Percent of Sales Forecasting method?

Describe in detail what exactly is the Cash Conversion Cycle, how is it computed and what is the purpose of this calculation (how is it used).