(11–10)

Replacement Analysis 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

$27,000 to $54,000 per year. The new machine will cost $82,500, and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over 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 12%. The old machine has been fully depreciated and has no CHALLENGING salvage value. Should the old riveting machine be replaced by the new one?

PROBLEMS 11–17