Question

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $150,000 and sell its old low-pressure glueball, which is fully depreciated, for $26,000. The new equipment has a 10-year useful life and will save $34,000 a year in expenses. The opportunity cost of capital is 11%, and the firm’s tax rate is 21%. What is the equivalent annual saving from the purchase if Gluon can depreciate 100% of the investment immediately. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Equivalent Savings

$9,696.20

Workings

Year	Purchase cost	After tax proceeds from sale	Tax shield on depreciation	Savings after tax	Net cash flow
0	-150000	20540			-129460
1			31500	26860	58360
2				26860	26860
3				26860	26860
4				26860	26860
5				26860	26860
6				26860	26860
7				26860	26860
8				26860	26860
9				26860	26860
10				26860	26860

Present value	57103.15
Equivalent Savings	$9,696.20