St. Johns River Shipyards is considering the replacement of an8-year-old riveting machine with a new one that will increase earnings before depreciationfrom $24,000 to $46,000 per year. The new machine will cost $80,000, and it will have anestimated life of 8 years and no salvage value. The new machine will be depreciated overits 5-year MACRS recovery period, so the applicable depreciation rates are 20%, 32%, 19%,12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm’s WACC is 10%.The old machine has been fully depreciated and has no salvage value. Should the old rivetingmachine be replaced by the new one? Explain your answer.
St. Johns River Shipyards is considering the replacement of an8-year-old riveting machine with a new one that will increase earnings before depreciationfrom $24,000 to $46,000 per year. The new machine will cost $80,000, and it will have anestimated life of 8 years and no salvage value. The new machine will be depreciated overits 5-year MACRS recovery period, so the applicable depreciation rates are 20%, 32%, 19%,12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm’s WACC is 10%.The old machine has been fully depreciated and has no salvage value. Should the old rivetingmachine be replaced by the new one? Explain your answer.
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter12: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 11P: REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old...
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Question
St. Johns River Shipyards is considering the replacement of an
8-year-old riveting machine with a new one that will increase earnings before depreciation
from $24,000 to $46,000 per year. The new machine will cost $80,000, and it will have an
estimated life of 8 years and no salvage value. The new machine will be
its 5-year MACRS recovery period, so the applicable depreciation rates are 20%, 32%, 19%,
12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm’s WACC is 10%.
The old machine has been fully depreciated and has no salvage value. Should the old riveting
machine be replaced by the new one? Explain your answer.
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