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Accounting

Problem:

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 $30,000 to $52,000 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%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 16%. The old machine has been fully depreciated and has no salvage value.

Problem:

Question 1: What is the NPV of the project?

Question 2: Should the old riveting machine be replaced by the new one?

Note: Explain all steps comprehensively.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91172568

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