Explore BrainMass
Share

Replacement analysis: Depreciation and Salvage Value

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

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 \$48,000 per year. The new machine will cost \$85,000, 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 20%. The old machine has been fully depreciated and has no salvage value. Conduct replacement analysis using the given information.

© BrainMass Inc. brainmass.com October 10, 2019, 7:41 am ad1c9bdddf
https://brainmass.com/business/credit-management-credit-policy-analysis-and-risk/replacement-analysis-depreciation-salvage-value-591480

Solution Preview

Step by step solution attached.

Step 1: To compute the relevant cash flows
Year 0 1 2 3 4 5 6 7 8
Machine cost \$(85,000)
Incremental earnings before depreciation \$18,000 \$18,000 \$18,000 \$18,000 \$18,000 \$18,000 \$18,000 \$18,000
Less: Depreciation expense \$17,000 \$27,200 ...

Solution Summary

This solution provides replacement analysis for a company in Excel.

\$2.19