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Problem: St. Johns rever shipyards welding machine is fifteen years old, fully depreciated, obsolete, and has no salvage value. But, even though it is obsolete, it is perfectly functional as originally designed and can be employed for quite a while longer. A new welder will cost $182,500 and have an estimated life of eight years with no salvage value. The new welder will be much more well-organized, but, and this improved efficiency will raise earnings before depreciation from $27,000 to $74,000 per year. The new machine will be depreciated over its five year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 40% and the firm's WACC is 12%. Should the old welder be replaced by the new one?

Financial Accounting, Accounting

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