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 $12,000, and has an estimated useful life of 6 years with an estimated salvage value of $1,200. This steamer falls into the MACRS 5-years class, 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 $1,400 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 12%.

 

 

 

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

 

 

  

 

A B C D E F G H 3 Old Equipment: 4 5 Depreciation expense, Years 1 to 5 Depreciation expense, Year 6 $650 6 Current book value 7 Current market value 8 Market value, Year 6 $325 $3,575 $4,150 $800 9 10 New Equipment: 11 Estimated useful life (in years) 6 12 Purchase price $12,000 13 Salvage value, Year 6 $1,200 14 Annual sales increase $2,000 15 Annual reduction in operating expenses $1,400 16 Initial increase in inventories $2,900 17 Initial increase in accounts payable $700 18 19 Year 1 Year 2 20 MACRS depreciation rates (5-year class): 20.00% 32.00% Year 3 19.20% Year 4 11.52% Year 5 11.52% Year 6 5.76% 21 22 Tax rate 40.00% 23 WACC 12.00% 24 25 Step 1: Calculation of investment at t=0 Formulas 26 Purchase price of new equipment -$12,000 27 Sale of old equipment $4,150 28 Tax on sale of old equipment #N/A 29 Change in net operating working capital #N/A 30 Total investment outlay #N/A 31 32 Step 2: Calculation of annual after-tax cash inflows 33 Annual sales increase 34 Annual reduction in operating expenses $2,000 $1,400 35 Annual increase in pre-tax revenues #N/A 36