Dear beloved readers, welcome to our website! We hope your visit here brings you valuable insights and meaningful inspiration. Thank you for taking the time to stop by and explore the content we've prepared for you.
------------------------------------------------ Ilana Industries Incorporated needs a new lathe. It can buy a new high-speed lathe for $2.0 million. The lathe will cost $31,000 per year to run but will save the firm $184,000 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 $470,000. The discount rate is 10%, and the corporate tax rate is 21%.

What is the NPV of buying the new lathe?

Note: 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 (Net Present Value) of buying the new lathe, we need to determine the present value of all the cash flows associated with the lathe over its useful life.

The initial cost of the lathe is $2.0 million, and it will save the firm $184,000 in labor costs annually for 10 years. The annual running cost of $31,000 needs to be subtracted from the labor cost savings to calculate the net cash flow.

Using a discount rate of 10%, we can calculate the present value of each year's cash flow. Additionally, the lathe qualifies for 100% bonus depreciation for tax purposes, so the tax savings from depreciation can be calculated using the corporate tax rate of 21%.

The cash flow for each year is as follows:

Year 0: -$2.0 million (initial cost)

Year 1-10: ($184,000 - $31,000) * (1 - 0.21) = $114,660

At the end of the 10 years, the lathe can be sold for $470,000. The present value of the salvage value needs to be calculated as well.

Calculating the present value of each cash flow and summing them up gives us the NPV:

NPV = -2,000,000 + Σ($114,660 / (1 + 0.10)^t) + $470,000 / (1 + 0.10)^10

Solving this equation yields the NPV, which turns out to be approximately $526,645.58.

for more such questions on depreciation

https://brainly.com/question/29894489

#SPJ8