Question

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $60,000 and sell its old low-pressure glueball, which is fully depreciated, for $10,000. The new equipment has a 10-year useful life and will save $14,000 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.)

Equilivant Annual Savings=

Answer 1

Sale proceeds of old machine(10,000*79) 7900
Tax savings on depreciation of new machine  
(60,000*100%*21%) 12600
  
Total 20500
PVAF(11%,10 years) 5.8892
  
"Equivalent annual savings apart from savings
in expenses (20,500/5.8892)" 3480.948176
  
Equivalent annual savings in expenses 14000
  
Total Equivalent annual savings 17480.95