Problem
Ilana Industries Inc. needs a new lathe. It can buy a new high-speed lathe for $1 million. The lathe will cost $36,000 per year to run, but it will save the firm $123,000 in labor 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%. Illana has many other assets in this asset class. The lathe is expected to have a 11 year life with a salvage value of %115000. The actual market value of the lathe at the same time will also be 115000. The discount rate is 5%, and the corporate tax rate is 35%.
What is the NPV of buying the new lathe?