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 $13,000, and has an estimated useful life of 6 years with an estimated salvage value of $1,300. 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 $1,600 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 13%.Required:A) Should it replace the old steamer?B) What is the NPV of the project? (Round your answer to the nearest dollar.)

Solution:

Purchase price -13,000

Sale of old machine 4150

Tax on sale of old machine -230

Change in net working capital -2200

Total investment 10,280

a. The market value reaches $4,150-$ 3,550= USD 600. Therefore, depreciation is offset by $600, and Taylor will continue to pay 0.40($600)= $240 in taxes

b. Net working capital shifts represent an increase of $2,900 in current assets versus a increase in $800 in accumulated liabilities totalling $2,200.

Examining the annual cash inflows:Sales increase 2,000

Cost decrease 1,900Increase in pre-tax revenues 3,900

After-tax revenue increase:$3,900(1-T) = $3,900(.60) = $2,340

Project cash flows:Initial outlay = -10,280

Year 1 = 3,040

Year 2 =3,616

Year 3 =3,002

Year 4 = 2,633

Year 5 = 2,633

Year 6 = 5,106

NPV of the project = $2,093.42 at WACC of 15%

The NPV of this incremental cash flow stream, when discounted at 15% is $2,083.51. Thus, the replacement should be made.

hi,

henry is an economist and wants to understand the relationship between inflation and consumer spending habits. for his research, he needs the consumer price index for 2014 and the inflation rate. based on the prices of goods given, what will he find to be the cpi and inflation rate for 2014? assume that a consumer’s basket for three consecutive years consists of the following:

you dont privide answer choices.

answer - 15% of a inflatation rate is 15% less in cpi