Mississippi River Shipyards is considering the replacement of an 8-year-old riveting machine

with a new one that will increase earnings before depreciation from $27,000 to $54,000 per
year. The new machine will cost $82,500, and it will have an estimated life of 8 years and no
salvage value. The new machine will be depreciated over its 5-year MACRS recovery period
so the applicable depreciation rates are 20 percent, 32 percent, 19 percent, 12 percent, 11 percent,
and 6 percent. The applicable corporate tax rate is 40 percent, and the firm’s cost of capital This Model is prepared by Rajib Dahal. If you need
is 12 percent. The old machine has been fully depreciated and has no salvage value. Should excelsheet calculation, please contact me at my email at
the old riveting machine be replaced by the new one? rajib.dahal@nu.edu.kz/rajib.dahal@gmail.com
Appendix 11B-3: Replacement Project Analysis
Assumptions
Increment of earnings from New Machine 27,000.00 Depreciation Schedule for five year property class (for tax purpose)
Cost of New Machine 82,500.00 20% 32% 19% 12% 11% 6%
Tax rate 0.40 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Cost of Capital 12%
Discounted Cash Flow Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
0 1 2 3 4 5 6 7 8
Increment of earnings from New Machine 27,000 27,000 27,000 27,000 27,000 27,000 27,000 27,000
D&A 16,500 26,400 15,675 9,900 9,075 4,950
Cashflow before taxation 10,500 600 11,325 17,100 17,925 22,050 27,000 27,000
Taxation 4,200 240 4,530 6,840 7,170 8,820 10,800 10,800
Cash flows after taxation 6,300 360 6,795 10,260 10,755 13,230 16,200 16,200
Add:D&A 16,500 26,400 15,675 9,900 9,075 4,950 0 0
Add: Capex (82,500)
Transaction Cashflow (82,500) 22,800 26,760 22,470 20,160 19,830 18,180 16,200 16,200
Discount Factor 1.000 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404
DCF (82,500) 20,357 21,333 15,994 12,812 11,252 9,211 7,328 6,543
NPV 22,329 Since the NPV ispositive, the oldriveting machine should be replaced by the new one.