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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.
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 depreciaiton expenses of $650 for five 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 | ||||||||
$1,500. This steamer falls into the MACRS 5-year 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 $1,900 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 15%. a. Should it replace the old steamer? b. NPV of replace = $2,083.51 SHOW WORK HOW TO GET THIS ANSWER |
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