Question

Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.01 million. The lathe will cost $36,500 to run, will save the firm $126,100 in labour costs, and will be useful for 8 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 8-year life with a salvage value of $94,000. The actual market value of the lathe at that time will also be $94,000. The discount rate is 12% and the corporate tax rate is 35%.

        

What is the NPV of buying the new lathe? (Round your answer to the nearest cent.)
NPV    $

Answer 1

Tax rate		35%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Year-8	Total
Cost		$        1,010,000	$          757,500	$           568,125	$           426,094	$           319,570	$           239,678	$      179,758	$      134,819
Dep Rate		25.00%	25.00%	25.00%	25.00%	25.00%	25.00%	25.00%	25.00%
Depreciation		$           252,500	$          189,375	$           142,031	$           106,523	$             79,893	$             59,919	$        44,940	$        33,705	$    908,886
WDV		$           757,500	$          568,125	$           426,094	$           319,570	$           239,678	$           179,758	$      134,819	$      101,114
Calculation of after-tax salvage value
Cost of machine			$       1,010,000
Depreciation			$          908,886
WDV			$          101,114
Sale price			$             94,000
Profit/(Loss)			$             (7,114)
Tax			$             (2,490)
Sale price after-tax			$             96,490
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Year-8
Saving in labor cost		$           126,100	$          126,100	$           126,100	$           126,100	$           126,100	$           126,100	$      126,100	$      126,100
Less: cost to run		$             36,500	$             36,500	$             36,500	$             36,500	$             36,500	$             36,500	$        36,500	$        36,500
Contribution		$             89,600	$            89,600	$             89,600	$             89,600	$             89,600	$             89,600	$        89,600	$        89,600
Less: Depreciation		$           252,500	$          189,375	$           142,031	$           106,523	$             79,893	$             59,919	$        44,940	$        33,705
Profit before tax		$         (162,900)	$          (99,775)	$           (52,431)	$           (16,923)	$               9,707	$             29,681	$        44,660	$        55,895
Tax@35%		$            (57,015)	$           (34,921)	$            (18,351)	$              (5,923)	$               3,398	$             10,388	$        15,631	$        19,563
Profit After Tax		$         (105,885)	$          (64,854)	$           (34,080)	$           (11,000)	$               6,310	$             19,292	$        29,029	$        36,332
Add Depreciation		$           252,500	$          189,375	$           142,031	$           106,523	$             79,893	$             59,919	$        44,940	$        33,705
Cash Profit after-tax		$           146,615	$          124,521	$           107,951	$             95,523	$             86,202	$             79,212	$        73,969	$        70,037
Calculation of NPV
						12.00%
Year		Capital		Operating cash	Annual Cash flow	PV factor	Present values
0		$      (1,010,000)			$      (1,010,000)	1.0000	$      (1,010,000)
1				$           146,615	$           146,615	0.8929	$           130,906
2				$           124,521	$           124,521	0.7972	$             99,268
3				$           107,951	$           107,951	0.7118	$             76,837
4				$             95,523	$             95,523	0.6355	$             60,707
5				$             86,202	$             86,202	0.5674	$             48,914
6				$             79,212	$             79,212	0.5066	$             40,131
7				$             73,969	$             73,969	0.4523	$             33,460
8		$             96,490		$             70,037	$           166,527	0.4039	$             67,257
					Net Present Value		$         (452,520)