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

Question

Gluon Inc. is considering the purchase of a new high pressure glue ball It can purchase the glue ball for S20.000 and sell its old low-pressure glue ball. which is fully depreciated, for S3.000. The new equipment has a 10-year useful life and will save $5.000 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.) Equivalent annual savings

Explanation / Answer

Tax rate 40% Annual depreciation 2000 Depreciation taxshield 800 Post tax saving in expenses 5000*(1-0.4) 3000 Annual cash flow from operation - incremental 3000+800 3800 Year DF @ 12% Cash flow from operation Cost of purchase less salvage Net cash flow PV 0 1 -17000 -17000 -17000 1 0.893 3800 3800 3392.857 2 0.797 3800 3800 3029.337 3 0.712 3800 3800 2704.765 4 0.636 3800 3800 2414.969 5 0.567 3800 3800 2156.222 6 0.507 3800 3800 1925.198 7 0.452 3800 3800 1718.927 8 0.404 3800 3800 1534.756 9 0.361 3800 3800 1370.318 10 0.322 3800 3800 1223.498 NPV 4470.848 Annuity factor for 10years @ 12% 5.65 Equivalent annual saving 4470.85/5.65 791.3

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

---

---

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