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.)

Answer 1

Initial Cost = Purchased price - salvage value after taxes

= 60,000 - 10,000 * (1-0.21)

= 52,100

Annual Cash Flow = (savings - Depriciation - taxes) + Depriciation

= ((14,000 - (60,000 / 10) - 21% * ((14,000 - (60,000 / 10)) + (60,000 / 10)

= 12320

Present Value of Cash Flows = 12320 * PVAF (11%, 10 years)

= 12320 * 5.88923201096

= 72555.338375

NPV = 72555.338375 - 52100 = 20455.34

equivalent Annual Savings = NPV / PVAF(11%, 10 years)

= 20455.34 / 5.88923201096

= 3473.35