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 $40,000 and sell its old low-pressure glueball, which is fully depreciated, for $6,000. The new equipment has a 10-year useful life and will save $10,000 a year in expenses. The opportunity cost of capital is 12%, 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 Depreciation on new machine = 40000/10 i.e 4000

Tax Saving on depreciation = 4000*40% i.e 1600

Annual savings in expenses net of tax = 10000*60% i.e 6000

Annual Cash Inflows = 1600+6000 i.e 7600

Years Cash Flows PVF @ 12% PV 0 -34000 1 -34000 1 7600               0.89            6,785.71 2 7600               0.80            6,058.67 3 7600               0.71            5,409.53 4 7600               0.64            4,829.94 5 7600               0.57            4,312.44 6 7600               0.51            3,850.40 7 7600               0.45            3,437.85 8 7600               0.40            3,069.51 9 7600               0.36            2,740.64 10 7600               0.32            2,447.00 Present Value 5.65022303            8,941.70 Equivalent annual savings            1,582.54

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.