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

Question

ana 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.)

ana 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

PV Factor Present Year Cashflows at 6% Value 0 - 1,500,000.00               1.00000 -1500000 1          96,000.00               0.94340 90566.0377 2          96,000.00               0.89000 85439.6582 3          96,000.00               0.83962 80603.4512 4          96,000.00               0.79209 76040.9917 5          96,000.00               0.74726 71736.7846 6          96,000.00               0.70496 67676.2119 7          96,000.00               0.66506 63845.4829 8          96,000.00               0.62741 60231.5876 9          96,000.00               0.59190 56822.2525 10          96,000.00               0.55839 53605.8986 Total -793431.643 Income After Adback Year Income Depreciation Income Tax Depreciation Cash inflows 1          96,000.00            96,000.00                     -                           -            96,000.00          96,000.00 2          96,000.00            96,000.00                     -                           -            96,000.00          96,000.00 3          96,000.00            96,000.00                     -                           -            96,000.00          96,000.00 4          96,000.00            96,000.00                     -                           -            96,000.00          96,000.00 5          96,000.00            96,000.00                     -                           -            96,000.00          96,000.00 6          96,000.00            96,000.00                     -                           -            96,000.00          96,000.00 7          96,000.00            96,000.00                     -                           -            96,000.00          96,000.00 8          96,000.00            96,000.00                     -                           -            96,000.00          96,000.00 9          96,000.00            96,000.00                     -                           -            96,000.00          96,000.00 10        636,000.00            96,000.00    540,000.00       378,000.00          96,000.00        474,000.00 Total    1,500,000.00         960,000.00    540,000.00       378,000.00        960,000.00    1,338,000.00 Annual Depreciation = (1,500,000-540,000)/10year = 96000 NPV   $   -793,431.64

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