Ilana Industries, Inc., 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 will save the firm $125,000 in labor costs, and will be useful for 10 years. Suppose that for tax purposes, the lathe will be depreciated on a straight-line basis over its 10-year life to a salvage value of $100,000. The actual market value of the lathe at that time also will be $100,000. The discount rate is 8%, and the corporate tax rate is 35%. What is the NPV of buying the new lathe?
Saving in Running expenses $90,000 ($125,000 , 35,000)
Add: Saving in Tax at 35% NIL
Net Saving per year$90,000