Replacement Analysis

St. Johns River Shipyards' 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. The 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 $25,000 to $78,500 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 40%, and the project cost of capital is 15%. Should the old welder be replaced by the new one? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign.

1)The NPV of the project is $

2)Old welder

-Select-

should

should not

be replaced.

Scenario Analysis

Shao Industries is considering a proposed project for its capital budget. The company estimates the project's NPV is $12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The company's CFO, however, forecasts there is only a 50% chance that the economy will be average. Recognizing this uncertainty, she has also performed the following scenario analysis:

Economic Scenario

Probability of Outcome

NPV

Recession

0.05

-$50 million

Below average

0.20

-22 million

Average

0.50

12 million

Above average

0.20

14 million

Boom

0.05

30 million

3)What are the project's expected NPV, standard deviation, and coefficient of variation? Enter your answers for the NPV and standard deviation in millions. For example, an answer of $1.24 million should be entered as 1.24, not 1,240,000. Do not round intermediate calculations. Round your answers to two decimal places.

E(NPV) = $million

_{NPV =} $million

CV_{NPV =}