Question: Replacement Analysis Saint John River Shipyard s welding machine is 1 5 years old, fully depreciated, and has no salvage value. However, even though it

Replacement Analysis

Saint John River Shipyard

s welding machine is

15

years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. A new welder will cost $

182, 500

and have an estimate life of

8

years with no salvage value. However, the new welder will be much more efficient, and this enhanced efficiency will increase annual cash flows before taxes

(

not including any CCA tax shield effects

)

from $

27, 000

to $

74, 000

per year. The new welder falls into Class

43

with a CCA rate of

30 % .

The applicable corporate tax rate is

25 %,

and the project cost of capital is

12 % .

What is the NPV if the firm replaces the old welder with the new one?

NPV

=

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