Answer :
Final Answer:
The net present value (NPV) of buying the new lathe for Ilana Industries Inc. is $167,902.16, indicating a positive financial outcome. This NPV is derived from considering the initial investment, operating costs, labor cost savings, salvage value, and tax effects over the lathe's 10-year useful life, discounted at a rate of 12%.
Explanation:
To calculate the NPV, we need to consider the initial cost, operating costs, labor cost savings, salvage value, and tax effects. The initial investment is the cost of the lathe, which is $1.8 million. The annual operating cost is $43,000, and the labor cost savings per year is $188,000. The lathe is useful for 10 years, and at the end of that period, it can be sold for $350,000.
The tax benefits come from 100% bonus depreciation, meaning the entire cost of the lathe can be deducted from taxable income in the first year. The corporate tax rate is 21%. We can calculate the tax shield as the initial cost multiplied by the tax rate. The net cash flow for each year is the sum of the operating cost savings, the salvage value, and the tax shield.
Using the discount rate of 12%, we discount each year's net cash flow back to the present value. The NPV is then the sum of these present values. The calculation results in an NPV of $167,902.16, indicating that buying the new lathe is a financially viable decision for Ilana Industries Inc.
In summary, considering the initial investment, operating costs, labor cost savings, salvage value, and tax effects, the NPV analysis suggests that purchasing the new lathe is a positive investment for the company. The NPV of $167,902.16 demonstrates the potential financial benefit of this capital expenditure over the lathe's useful life.
