$(11-10)$ Replacement Analysis

St$.$ Johns River Shipyard's 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 $$182,500$ and have an estimated life of $8$ years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $$27,000$ to $$74,000$ per year. The new machine will be depreciated over its $5-$year MACRS recovery period, so the applicable depreciation rates are $20\mathrm{.}00\%,32\mathrm{.}00\%,19\mathrm{.}20\%,11\mathrm{.}52\%,11\mathrm{.}52\%,$ and $5\mathrm{.}76\%.$ The applicable corporate tax rate is $25\%,$ and the project cost of capital is $12\%.$ What is the NPV if the firm replaces the old welder with the new one?

Answer:

NPV of replace $=$$$26,285.$