]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=