REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $24,000 to $46,000 per year. The new machine will cost $80,000, 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 10%. The old machine has been fully depreciated and has no salvage value. Should the old rivet- ing machine be replaced by the new one? Explain your answer.

Listen You want to buy a new equipment to replace an existing one. The new equipment will be depreciated down to zero using straight-line depreciation over its 10-year life. The project is a 10-year project. The market value of the new equipment at the end of year 10 is expected to be 0. The new equipment will replace an existing old equipment that has 10 years left of depreciation at a $3,000 a year. The estimated before tax proceeds from selling this existing equipment is $15,000 today. The market value in 10 years for this old equipment would be 0. The new equipment will generate annual cost savings of $12,000 before taxes. The tax rate is 20% and the discounting rate is 10%. What is the maximum price you are willing to pay today for the new equipment? For your answer, do not enter the dollar sign ($), DO NOT use commas, and you can round to zato decimals (the nearest dollar). Your Answer: Answer

Terminal cash flow: Replacement decision Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $207,000 and will require $29,200 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). A $26,000 increase in net working capital will be required to support the new machine. The firm's managers plan to evaluate the potential replacement over a 4-year period. They estimate that the old machine could be sold at the end of 4 years to net $14,000 before taxes; the new machine at the end of 4 years will be worth $73,000 before taxes. Calculate the terminal cash flow at the end of year 4 that is relevant to the proposed purchase of the new machine. The firm is subject to a 21% tax rate. The terminal cash flow for the replacement decision is shown below: (Round to the nearest…

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