Excel Online Structured Activity: Replacement Analysis The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $650 for 5 years and $325 for the sixth year. Its current book value is $3,575, and it can be sold on an Internet auction site for $4,150 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life. Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $11,000, and has an estimated useful life of 6 years with an estimated salvage value of $1,100. This steamer falls into the MACRS 5-years dass, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and would allow for an output expansion, so sales would rise by $2,000 per year; even so, the new machine's much greater efficiency would reduce operating expenses by $1,500 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal-plus-state tax rate is 40%, and its WACC is 13%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Should it replace the old steamer? The old steamer be replaced. What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. $ Hile Home Insert Draw Page Layout Formulas Data Review Com View Heti Editing 29 Currency Arial 10 B DEVA E ES M D E 0 H BH Replacement Analysis 2 Old Equipment Depreciation peme Years 1 to 5 5 Depreciation expense Year Current book value Current market value Market value Year 5650 $325 53.575 54.150 $800 10 New Equipment 11 Estimated useful in your 13 Purchase price Svag value Year 1 Annual sau 15 Annual reduction in operating per incinnaties Tilancin accounts payat 6 511 000 51.100 52.000 $1,500 52.900 5700 Year 2 Year 5 Year 1 20.00% Year 3 19.20% Year 4 11.52% Year 6 5.76% MACRS depreciation rates (5-year class) 32.00% 11.52% Tax rate WACC 40.00% 13.00% Formulas $11,000 $4,150 Step 1 Calculation of investment at 0 Purchase price of new equipment Sale of old equipment Tax on sale of old equipment Change in net operating working capital Total investment outlay NNA UNA NIA Step 2 Calculation of annual after-tax cash inflows Annual sales increase Annual reduction in operating expenses Annual increase in pre-tax revenues $2,000 $1,500 #NIA Alter tax annual revenue increase WNIA Step 3. Calculation of annual depreciation tax savings Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 New equipment Old equipment Change in annual depreciation $650 $650 $650 -$650 $650 -S650 $650 $650 $650 5650 $325 -$325 Annual dpreciation tax savings Formulas Year 2 New equipment Old equipment Change in annual depreciation Year 1 WNIA $650 $650 Year 3 #N/A $650 $650 Year 4 N/A $650 $650 Year 5 UNIA $650 5650 Year 6 #N/A $325 $325 5650 $650 Annual depreciation tax savings MNIA WNIA #N/A ANIA ANIA WNIA Stop & Calculation af ner present value of replacement Year Year! Year 2 Year 3 Year 4 Year 5 Yeart Form 50 50 50 SO 30 30 SS SO TO 50 50 Intial investment outlay Annual tax revenue increase Annual depreciation tax savings Working capital recovery Salvage value on new equipment Tax on sage value of new equipment Opportunity cost of old aument Pet shows 51100 SO 50 50 SO 50 30 Net present Value Should fem replace the old equipment? Formulas ANIA ONIA
