St Johns River Shipyards welding machine is 15 years old ful

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. The new welder will cost $82,500 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 $25,000 to $50,000 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 40%, and the project cost of capital is 14%. Should the old welder be replaced by the new one?

What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest cent.

Solution

t = 0 ............ Investment = 82500

Annual cash flows for next 5 years are computed in the following table.

Last step - Calculate NPV

Explanation

In the first table...... (1) we started with Income before depreciation = 25000. This is the value obtained as difference between past earnings and new earnings ( 50000 - 25000). Thus incremental earnings due to new welder is relevant.

(2) Depreciation is caculated on 82500 by multiplying with given rates of depreciation.

In the table - 2 ......... Discounting factors (DF) are computed as 1/1.14..... for year - 1 and continue to press \"=\" will give subsequent year values.

PV = Present value = DF * CF