Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1.8 million. The lathe will cost $53,000 per year to run, but it will save the firm $183,000 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 $500,000. The discount rate is 12%, 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.)
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
Cost | -1800000 | ||||||||||
save in labor costs | 183000 | 183000 | 183000 | 183000 | 183000 | 183000 | 183000 | 183000 | 183000 | 183000 | |
Cost of operation | -53000 | -53000 | -53000 | -53000 | -53000 | -53000 | -53000 | -53000 | -53000 | -53000 | |
cash flow from operation | 130000 | 130000 | 130000 | 130000 | 130000 | 130000 | 130000 | 130000 | 130000 | 130000 | |
Depreciation | -90000 | 18000 | 14400 | 11520 | 9216 | 7372.8 | 6553.6 | 6553.6 | 6553.6 | 6553.6 | |
Add residual value of lathe | 500000 | ||||||||||
Net cash flow | 40000 | 148000 | 144400 | 141520 | 139216 | 137372.8 | 136553.6 | 136553.6 | 136553.6 | 636553.6 | |
Tax(21%) | -8400 | -31080 | -30324 | -29719.2 | -29235.4 | -28848.3 | -28676.3 | -28676.256 | -28676.256 | -133676.26 | |
Net cash after tax | 31600 | 116920 | 114076 | 111800.8 | 109980.6 | 108524.5 | 107877.3 | 107877.344 | 107877.344 | 502877.344 | |
Add Depreciation | 121600 | 98920 | 99676 | 100280.8 | 100764.6 | 101151.7 | 101323.7 | 101323.744 | 101323.744 | 496323.744 | |
Cash flow | -1800000 | 121600 | 98920 | 99676 | 100280.8 | 100764.6 | 101151.7 | 101323.7 | 101323.744 | 101323.744 | 496323.744 |
PV of cash flow @12% | -1800000 | 108571.4286 | 78858.42 | 70947.41 | 63730.26 | 57176.56 | 51246.61 | 45833.72 | 40922.9608 | 36538.35786 | 159802.962 |
Discount rate | 12% | ||||||||||
NPV | -1086371.32 | sum of all PV (Cash flow) |
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