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.)

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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