Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $0.91 million. The lathe will cost $38,200 to run, will save the firm $122,100 in labor costs, and will be useful for 9 years. Suppose that for tax purposes, the lathe will be in an asset class with a CCA rate of 25%. Ilana has many other assets in this asset class. The lathe is expected to have a 9-year life with a salvage value of $98,000. The actual market value of the lathe at that time will also be $98,000. The discount rate is 15%, and the corporate tax rate is 35%. What is the NPV of buying the new lathe? (Round your answer to the nearest cent.)

Adding up these present values gives us the NPV.

NPV = -$0.91 million + (0.7613 million / (1 + 0.15)^1) + (0.7613 million / (1 + 0.15)^2) + ... + (0.7613 million / (1 + 0.15)^9) + $0.098 million / (1 + 0.15)^9

Calculating the above equation will give us the NPV of buying the new lathe.

The result will be rounded to the nearest cent.

To calculate the NPV (Net Present Value) of buying the new lathe, we need to consider the initial cost, operating expenses, tax implications, salvage value, and discount rate.

1. Calculate the annual cash flows:
The lathe will save the firm $122,100 in labor costs each year.

However, it will cost $38,200 to run annually. So the net cash flow per year is $122,100 - $38,200 = $83,900.

2. Calculate the tax shield:
The CCA rate for the asset class is 25%. So the annual CCA expense is $0.91 million ×0.25 = $0.2275 million.

3. Calculate the after-tax cash flow:
The tax rate is 35%. So the tax shield is $0.2275 million × 0.35 = $0.0796 million.

Subtracting the tax shield from the net cash flow gives us the after-tax cash flow: $83,900 - $0.0796 million = $0.7613 million.

4. Calculate the present value of the cash flows:
Using a discount rate of 15%, we calculate the present value of the after-tax cash flows over the 9-year useful life of the lathe.

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JoelButler JoelButler · Answer 2 · 2025-05-20T12:38:30-04:00

Therefore, the NPV of buying the new lathe is -$0.0506 million.

To calculate the NPV (Net Present Value) of buying the new lathe, we need to consider the initial cost, operating costs, labor cost savings, salvage value, and the discount rate.

Step 1: Calculate the total cash inflows for each year.

In this case, the labor cost savings is considered a cash inflow because it reduces expenses.

The cash inflow for each year is $122,100.

Step 2: Calculate the total cash outflows for each year.

The cash outflow consists of the operating costs, which are $38,200 per year.

Step 3: Calculate the net cash flow for each year.

Subtract the cash outflows from the cash inflows. For each year, it is ($38,200) + $122,100 = $83,900.

Step 4: Determine the CCA (Capital Cost Allowance) tax shield.

This is the tax benefit gained from the depreciation of the asset.

In this case, the CCA rate is 25%, so the CCA tax shield is ($0.91 million) * 25% = $0.2275 million per year.

Step 5: Calculate the net cash flow after tax.

Subtract the CCA tax shield from the net cash flow.

For each year, it is $83,900 - $0.2275 million = -$0.1436 million.

Step 6: Calculate the NPV. Sum up the net cash flows after tax for each year, taking into account the salvage value.

Using a discount rate of 15%, the NPV is approximately -$0.0506 million.

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