Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for
ID: 2652876 • Letter: I
Question
Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.5 million. The lathe will cost $40,000 per year to run, but will save the firm $136,000 in labor costs, and will be useful for 10 years. Suppose that for tax purposes, the lathe will be depreciated on a straight-line basis over its 10-year life to a salvage value of $540,000. The actual market value of the lathe at that time also will be $540,000. The discount rate is 6%, and the corporate tax rate is 30%. What is the NPV of buying the new lathe? (Negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.)
Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.5 million. The lathe will cost $40,000 per year to run, but will save the firm $136,000 in labor costs, and will be useful for 10 years. Suppose that for tax purposes, the lathe will be depreciated on a straight-line basis over its 10-year life to a salvage value of $540,000. The actual market value of the lathe at that time also will be $540,000. The discount rate is 6%, and the corporate tax rate is 30%. What is the NPV of buying the new lathe? (Negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.)
Explanation / Answer
Annual Cash Flow = (Labor Cost Saving - running Cost)*(1-tax rate) + annual depreciation * tax rate
annual depreciation = (1500000-540000)/10
annual depreciation = $ 96000
Annual Cash Flow = (136000-40000)*(1-30%) + 96000*30%
Annual Cash Flow = $ 96000
NPV = - 1500000 + 96000*PVIFA(6%,10) + 540000*PVIF(6%,10)
NPV = - 1500000 + 96000*7.36008705 + 540000*0.55839478
NPV = - $ 491,898.46
Answer
NPV - $ 491,898.46