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

]Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.4 million. The lathe will cost $39,000 per year to run, but it will save the firm $134,000 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 $450,000. The actual market value of the lathe 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 the new lathe? (A 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.)

NPV=

Expert Solution

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

jeff jeffy answered 1 year ago

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