HomeworkLib
Question

Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $0.94...

Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $0.94 million. The lathe will cost $30,700 to run, will save the firm $129,600 in labour costs, and will be useful for 10 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 10-year life with a salvage value of $118,000. The actual market value of the lathe at that time will also be $118,000. The discount rate is 5% and the corporate tax rate is 35%. What is the NPV of buying the new lathe? (Round your answer to the nearest cent.)

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

NPV of the project is the present value of future cash flows less intial investment.

To calculate the NPV, free cash flow of the project needs to be calculated as follows:

Free Cash Flow = Operating Cash Flow - Capital Expenditures - Change in working capital

Operating Cash Flow = EBIT*(1-Tax Rate)+Depreciation

A1 B C Free cash flow can be calculated as follows: 4Free Cash Flow Operating Cash Flow-Capital Expenditures- Change in working capital 5 Operating Cash Flow = EBIT*( 1-Tax Rate)+Depreciation Tax Rate Equipment Cost Life of Machine Salvage value at year 10 Market Value at year 10 CCA Rate Year Depreciation Expense Book Value (Note: In cCA Calculation Salvage Value is ignored) Net Proceed from sale calculation: Initial Cost of machine Market Value at the end of 10th year Book Value of machine at the end of Gain or Loss on sale of Machine 35% 940,000 10 years $118,000 $118,000 25% 12 $235,000 | $176,250| $132,188| $99, 141 | $74,355 | $55,767| $41,825 | $31,369| $23,527| $17,645|=M14*SDS11 14 $940,000 $705,000 $528,750 $396,563 $297,422 $223,066 $167,300 $125,475 $94,106 $70,580 $52,935-M14-N13 940,000 $52,935 $65,065 =D18-D19 $65,065 -D21 $118,000 19 20 -Proceed From Sale Book value at the end of sale Gain or Loss on sale of Machine Tax on Gain & Loss Net Proceed from Sale $22,772.85 -D23 D6 -Proceed from Sale - Tax Expense on gain or loss 26 $95,227 -D18-D24 Free cash flow can be calculated as followed: Year Savings Operating Cost Depreciation Operating Income Before Tax (EBIT) Tax (@35% After Tax Add Depreciation 29 10 129,600 $129,600 $129,600 $129,600 $129,600 $129,600 $129,600 $129,600 $129,600 $129,600 ($30,700)($30,700($30,700) (S30,700) ($30,700) ($30,700) ($30,700) ($30,700) ($30,700) ($30,700) ($41,825) ($31,369) ($23,527) ($17,645 32 ($235,000) (S176,250) ($132,188) ($99,141) ($74,355) ($55,7 5-SUM(N30:N32) 635 $27,073 $84 ($8,591) ($15,097) ($19,976) ($23,636) ($26,381) ($28,439)N33 *SDŞ6 ($88,465)$50,278)($21,637)($156) $15,954 $28,037 $37,099 $43,895 $48,993 $52,816N33+N34 $235,000「$176,250「$132,188 | $99,141 | $74,355 | $55,767| $41,825 | $31,369 | $23,527| $17,645 |=-N32 $146,535 $125,973 $110,551 $98,984 $90,309 $83,803 $78,924 $75,264 $72,519 $70,461 N35+N36 35 rating income (EBIT (1 rating Cash Flow 940,000 Initial investment in Equipment Net Proceed from Sale of Machine Free Cash Flow $95,227D26 ($940,000)$146,535 $125,973 $110,551 $98,984 $90,309 $83,803 $78,924 $75,264 $72,519 $165,688 N37+N39 NPV of the project is present value of future cash flows discounted at required rate of return less the initial investment, Given the following cash flow and discount rate, NPV for the project can be calculated as follows: Year Free Cash Flow (FCF Discount rate (i (P/F,i,n) for each year Present Value of cash flows- Present value if future cash flows ($940,000) $146,535 $125,973 $110,551 $98,984 $90,309 $83,803 $78,924 $75,264 $72,519 $165,688 47 0.95 0.91 0.86 0.82 0.78 0.75 0.71 0.68 0.64 0.61 139,557 $114,261 $95,498 $81,435 $70,760 $62,535 $56,090 $50,942 $A6,747 $101,718 S819,541.22SUM(E48:N48 NPV for Project =Present value fo future cash flows-Initial investment ($120,458.78) D49+D45 Hence NPV of the project is $120,458.78

0 0
Add a comment
Know the answer?
Add Answer to:
Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $0.94...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $0.94...

    Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $0.94 million. The lathe will cost $30,700 to run, will save the firm $129,600 in labour costs, and will be useful for 10 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 10-year life with a salvage value...

  • Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.09...

    Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.09 million. The lathe will cost $38,600 to run, will save the firm $121,500 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...

  • Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.01 million. The lathe will cost $...

    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...

  • llana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.09...

    llana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1.09 million. The lathe will cost $32,100 to run, will save the firm $119,300 in labour costs, and will be useful for 11 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 11-year life with a salvage value...

  • ABC Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $0.95...

    ABC Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $0.95 million. The lathe will cost $33,100 to run, will save the firm $131,300 in labour costs, and will be useful for 11 years. Suppose that for tax purposes, the lathe will be in an asset class with a CCA rate of 25%. ABC has many other assets in this asset class. The lathe is expected to have a 11-year life with a salvage value...

  • Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1.7...

    Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1.7 million. The lathe will cost $42,000 per year to run, but it will save the firm $164,000 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 $480,000. The discount rate is 12%, and the corporate tax rate...

  • Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1.5...

    Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1.5 million. The lathe will cost $50,000 per year to run, but it will save the firm $160,000 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 $400,000. The discount rate is 10%, and the corporate tax rate...

  • Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1.4...

    Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1.4 million. The lathe will cost $49,000 per year to run, but it will save the firm $144,000 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 $450,000. The discount rate is 10%, and the corporate tax rate...

  • Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1.8...

    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...

  • Maiden Industries, Inc., needs a new coffee. It can buy a new high-speed coffee for $0.96...

    Maiden Industries, Inc., needs a new coffee. It can buy a new high-speed coffee for $0.96 million. The coffee will cost $34,500 to run, will save the firm $129,600 in labour costs, and will be useful for 12 years. Suppose that for tax purposes, the coffee will be in an asset class with a CCA rate of 25%. Maiden has many other assets in this asset class. The coffee is expected to have a 12-year life with a salvage value...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT