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Ilana industries incorporated needs a new lathe. It can buy a new high-speed lathe for $1 million. The lathe will cost $35,000 per year to run, but it will save the firm $125,000 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 $100,000. The discount rate is 8%, and the corporate tax rate is 21%. What is the npv of buying the new lathe?.

Answer :

The new lathe's net present value (npv) is $349,773.33

What is the net present value of buying a new lathe?

[(Revenues - Cash Expenses) divided by (1 - Tax Rate)] is the operating cash flow formula. + ($0 - ($35,000 - 125,000) (1 - 0.35)] (Tax rate Depreciation) - (Tax rate) + 0.35 [($1m - 100,000) / 10] = $90,000

Cost of the new machine minus NPV (OCF - Annuity Factor) PV for the sale price and PV for the sales tax are equal to $1 million plus $90,000 - ([0.08(1 + 0.08)10]) + ($100,000 / 1.0810) - [0.35 ($100,000 - 100,000)] / 1.0810 = -$349,773.33

Net present value is the difference between the current worth of cash inflows and outflows over time (NPV). NPV is a metric that is used in capital planning and investments to assess the profitability of a proposed project or investment.

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