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 $700 for 5 years and $325 for the sixth year. Its current book value is $3,825, and it can be sold on an Internet auction site for $4,465 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 $11,900, and has an estimated useful life of 6 years with an estimated salvage value of $1,700. 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 allows for an output expansion, so sales would rise by $2,000 per year; 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 25%, and the project cost of capital is 13%. What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. $ Should it replace the old steamer? The old steamer -Select- ✓ be replaced.
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 $700 for 5 years and $325 for the sixth year. Its current book value is $3,825, and it can be sold on an Internet auction site for $4,465 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 $11,900, and has an estimated useful life of 6 years with an estimated salvage value of $1,700. 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 allows for an output expansion, so sales would rise by $2,000 per year; 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 25%, and the project cost of capital is 13%. What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. $ Should it replace the old steamer? The old steamer -Select- ✓ be replaced.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 17P
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Transcribed Image Text: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 $700 for 5 years and
$325 for the sixth year. Its current book value is $3,825, and it can be sold on an Internet auction site for $4,465 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 $11,900, and has an estimated useful life of 6 years with an estimated salvage value of $1,700. 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 allows for an output expansion, so sales would rise by $2,000 per year; 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 25%, and the project cost of capital is 13%.
What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
$
Should it replace the old steamer?
The old steamer -Select-
be replaced.
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