ivity: 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 $$13,000,$ and has an estimated useful life of $6$ years with an estimated salvage value of $$1,300.$ This steamer falls into the MACRS $5-$years class, 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 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 $14\%.$

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.

X

Open spreadsheet

Should it replace the old steamer?

The old steamer should $vv$ be replaced.

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

$

$1222$

$54$

$55$ ent

$56$ Year $0$

Year $1$

Year $2$

$57-$$$10,800$

C

D

$58$

$$2$

$59$

$$780$

$60$

$61$

$62$

$63$

$64$

$-$$$10,800$

$$2,880$

$$3,50$

$65$

$66$

Formulas

$67$

$$1,222=NPV(B23,C64$:$H64)+B64$

find Correct NPV