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Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1.5 million. The lathe will cost $50,000 per year to run, but it will save the firm $160,000 in labor costs and will be useful for 10 years. Suppose that for tax purposes, the lathe is entitled to 100% bonus depreciation. At the end of the 10 years, the lathe can be sold for $400,000. The discount rate is 10%, and the corporate tax rate is 21%.

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.)

Answer :

The NPV of buying the new lathe for Ilana Industries Inc. is $350,720.14.

To calculate the NPV, we need to determine the cash flows for each year, including the initial cost, operating costs, labor cost savings, salvage value, and tax benefits.

Year 0:

Initial cost of lathe: -$1,500,000 (outflow)

Years 1-10:

Operating costs: -$50,000 per year (outflow)

Labor cost savings: +$160,000 per year (inflow)

Tax benefits (100% bonus depreciation): +$315,000 per year (inflow)

Year 10:

Salvage value: +$400,000 (inflow)

Using a discount rate of 10% and a tax rate of 21%, we can calculate the present value of each cash flow and sum them up to find the NPV.

NPV = Present value of cash inflows - Present value of cash outflows

Present value of cash inflows:

(10 * ($160,000 + $315,000) + $400,000) / (1 + 0.10)^10 = $2,245,499.28

Present value of cash outflows:

$1,500,000 / (1 + 0.10)^0 = $1,500,000

(10 * $50,000) / (1 + 0.10)^1 = $410,256.41

Tax benefits reduce the outflow by 21%:

$315,000 * 0.21 = $66,150

($50,000 - $66,150) / (1 + 0.10)^1 = -$15,477.27

Total present value of cash outflows: $1,500,000 + $410,256.41 + (-$15,477.27) = $1,894,779.14

NPV = $2,245,499.28 - $1,894,779.14 = $350,720.14

To learn more about cash flows, click here: https://brainly.com/question/27994727

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