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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.

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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 $600 for 5 years and S305 for the sixth year. Its current book value is $3,305, and it can be sold on an Intemet auction site for $3,835 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 $1,600. 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 allows for an output expansion, so sales would rise by $2,000 per year, the new machine's much greater efficiency would reduce operating expenses by $1,600 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 the project cost of capital is 15%. What is the NPV of the project? Should the old steamer be replaced? Do not round intermediate calculations. Round your answer to the nearest dollar Cash flow in Year 0 Operating cash flows Year I through 6 -Change in depreciation Year New Machine Basis New Machine Depreciation New Old Tax Savings Old Machine Depreciation 1 2 3 4 I 6 -Change in after-tax income Operating cash flows Year Change in after-tax Change in after-tax OCF income depreciation 1 2 3 I 4 5 6 Net salvage cash flow in Year 6 Project CFs: Year 0 1 2 3 4 5 6 lait, investment Net OCF ANWC Net salvage CF Project net CF NPV: Replace: Y/N

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