Question

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $130,000 and sell its old low-pressure glueball, which is fully depreciated, for $22,000. The new equipment has a 10-year useful life and will save $30,000 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

Cost of glueball =$130,000

Salvage value/Current value=22,000(Fully depreciated)

Useful life of new glueball =10 years

Savings in yera expenses=$30,000

Cost of capital=11%

Corporate tax rate=21%

NPV=31574.80

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