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    Replacement analysis: Depreciation and Salvage Value

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    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.

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    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.