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.)

  

  Equivalent annual savings $   

Explanation / Answer

Working:

Step-1: Calculate the initial cost: Cost of new machine 40000 Less: sale from old machiine 3600 Initial cost 36400 Sale 6000 Less: Book Value 0 Profit 6000 Tax 2400 After tax cash proceeds 3600

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