Excel Online Structured Activity: Replacement Analysis The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $650 for 5 years and $325 for the sixth year. Its current book value is $3,575, and it can be sold on an Internet auction site for $4,150 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life. Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $12,000, and has an estimated useful life of 6 years with an estimated salvage value of $1,200. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and would allow for an output expansion, so sales would rise by $2,000 per year; even so, the new machine's much greater efficiency would reduce operating expenses by $1,500 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal-plus-state tax rate is 40%, and its WACC is 16%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. X Open spreadsheet Should it replace the old steamer? The old steamer be replaced. What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. $ Replacement Analysis O New Equipment: 3 Old Equipment: Depreciation expense, Years 1 to 5 Depreciation expense, Year 6 Current book value Current market value Market value, Year 6 Estimated useful life (in years) Purchase price 3 Salvage value, Year 6 4 Annual sales increase 5 Annual reduction in operating expenses 5 9 Initial increase in inventories Initial increase in accounts payable OMACRS depreciation rates (5-year class); 1 2 Tax rate 3 WACC 4 5 Step 1: Calculation of investment at t = 0 5 Purchase price of new equipment Sale of old equipment 3 Tax on sale of old equipment Change in net operating working capital $650 $325 $3,575 $4,150 $800 6 $12,000 $1,200 $2,000 $1,500 $2,900 $700 Year 1 20.00% 40.00% 16.00% -$12,000 $4,150 Year 2 32.00% Formulas #N/A #N/A Year 3 19.20% E Year 4 11.52% Year 5 11.52% Year 6 5.76% H 39 Step 3: Calculation of annual depreciation tax savings 10 #1 New equipment #2 Old equipment 13 Change in annual depreciation 14 15 Annual dpreciation tax savings 20 16 17 18 10 9 New equipment 50 Old equipment 50 51 Change in annual depreciation 52 53 Annual depreciation tax savings 54 55 Step 4: Calculation of net present value of replacement 56 Formulas 0 57 Initial investment outlay 99 58 Annual after-tax revenue increase Annua 59 Annual depreciation tax savings 50 Working capital recovery 51 Salvage value on new equipment Tax on salvage value of new equipment 52 5 53 54 55 Opportunity cost of old equpment Project cash flows 56 57 Net present value Year 1 $650 -$650 Year 1 #N/A $650 -$650 #N/A T Year 0 $0 $0 Year 2 Year 2 #N/A #N/A Year 1 Formulas #N/A $650 -$650 $650 -$650 $0 $0 $0 Year 3 $650 -$650 Year 3 #N/A $650 -$650 #N/A Year 2 $0 $0 $0 Year 4 $650 -$650 Year 4 #N/A $650 -$650 #N/A Year 3 SO $0 $0 Year 5 $650 -$650 Year 5 #N/A $650 -$650 #N/A Year 4 $0 $0 $0 Year 6 $325 -$325 Year 6 #N/A $325 -$325 #N/A Year 5 SO SO SO Year 6 $0 $0 $1,200 Y Formulas #N/A #N/A #N/A #N/A