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]Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.4...

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]Ilana Industries, Inc., needs a new lathe. It can buy a newhigh-speed lathe for $1.4 million. The lathe will cost $39,000 peryear to run, but it will save the firm $134,000 in labor costs andwill be useful for 10 years. Suppose that for tax purposes, thelathe will be depreciated on a straight-line basis over its 10-yearlife to a salvage value of $450,000. The actual market value of thelathe at that time also will be $450,000. The discount rate is 8%,and the corporate tax rate is 20%. What is the NPV of buying thenew lathe? (A negative amount should be indicated by aminus sign. Enter your answer in dollars not in millions. Do notround intermediate calculations. Round your answer to 2 decimalplaces.)

NPV=

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3.9 Ratings (767 Votes)

Time line 0 1 2 3 4 5 6 7 8 9 10
Cost of new machine -1400000
=Initial Investment outlay -1400000
Sales 134000 134000 134000 134000 134000 134000 134000 134000 134000 134000
Profits Sales-variable cost 95000 95000 95000 95000 95000 95000 95000 95000 95000 95000
-Depreciation (Cost of equipment-salvage value)/no. of years -95000 -95000 -95000 -95000 -95000 -95000 -95000 -95000 -95000 -95000 450000 =Salvage Value
=Pretax cash flows 0 0 0 0 0 0 0 0 0 0
-taxes =(Pretax cash flows)*(1-tax) 0 0 0 0 0 0 0 0 0 0
+Depreciation 95000 95000 95000 95000 95000 95000 95000 95000 95000 95000
=after tax operating cash flow 95000 95000 95000 95000 95000 95000 95000 95000 95000 95000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 360000
+Tax shield on salvage book value =Salvage value * tax rate 90000
=Terminal year after tax cash flows 450000
Total Cash flow for the period -1400000 95000 95000 95000 95000 95000 95000 95000 95000 95000 545000
Discount factor= (1+discount rate)^corresponding period 1 1.08 1.1664 1.259712 1.360489 1.4693281 1.5868743 1.713824 1.8509302 1.999005 2.158925
Discounted CF= Cashflow/discount factor -1400000 87962.96296 81447.18793 75414.063 69827.836 64655.404 59866.115 55431.59 51325.544 47523.65 252440.5
NPV= Sum of discounted CF= -554105.20

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Transcribed Image Text

]Ilana Industries, Inc., needs a new lathe. It can buy a newhigh-speed lathe for $1.4 million. The lathe will cost $39,000 peryear to run, but it will save the firm $134,000 in labor costs andwill be useful for 10 years. Suppose that for tax purposes, thelathe will be depreciated on a straight-line basis over its 10-yearlife to a salvage value of $450,000. The actual market value of thelathe at that time also will be $450,000. The discount rate is 8%,and the corporate tax rate is 20%. What is the NPV of buying thenew lathe? (A negative amount should be indicated by aminus sign. Enter your answer in dollars not in millions. Do notround intermediate calculations. Round your answer to 2 decimalplaces.)NPV=

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