Gluon Inc. is considering the purchase of a new high pressure glueball. It can p

Question

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $90,000 and sell its old low-pressure glueball, which is fully depreciated, for $16,000. The new equipment has a 10-year useful life and will save $20,000 a year in expenses. The opportunity cost of capital is 8%, and the firm’s tax rate is 40%. What is the equivalent annual savings from the purchase if Gluon uses straight-line depreciation? Assume the new machine will have no salvage value. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

Annual saving Saving In Cost 20000 Depreciation 9000 Income 11000 Tax 4400 Net saving 6600 Add depreciation 9000 Cash flow 15600 PV Factor at 8% 6.7101 PV of cash flow 104677.3 GlueBall cost 90000 After tax salvage value 9600 Initial investment 80400 NPV Initial Investment. 80400 PV of cash flow 104677 Net present Value 24277 Equivalent annual savings =PMT(8%,10,-24277,0,0) Equivalent annual savings $                                                   3,618.0

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