Question

gluon inc. is considering the purchase of a new high pressure glueball. it can purchase the glueball for $90,000 and sell its old low pressure glueball, which is fully depreciated, for $16,000. the new equipment has a 10-year useful life and will save $20,000 a year in expenses. the opportunity cost of capital is 8%, 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 immediatley.

Answer 1

To calculate the equivalent annual saving from the purchase, we need to consider the initial cost of the new glueball, the proceeds from selling the old glueball, and the annual cost savings from the new equipment. By using the formula for present discounted value, we can calculate the equivalent annual saving: The equivalent annual saving from the purchase of the new glueball is $28,900.

Step-by-step explanation:

To calculate the equivalent annual saving from the purchase, we need to consider the initial cost of the new glueball, the proceeds from selling the old glueball, and the annual cost savings from the new equipment.

The initial cost of the new glueball is $90,000.

The proceeds from selling the old glueball is $16,000.

The annual cost savings from the new equipment is $20,000.

Next, we need to calculate the present discounted value of these cash flows.

Since the equipment has a 10-year useful life, we will discount the cash flows over a 10-year period.

The opportunity cost of capital is 8%.

The firm's tax rate is 21%.

By using the formula for present discounted value, we can calculate the equivalent annual saving:

1. Calculate the depreciation expense using the full amount of the investment - $90,000.
2. Calculate the tax savings from the depreciation expense by multiplying the depreciation expense by the tax rate - $18,900 (90,000 * 0.21).
3. Add the tax savings to the annual cost savings from the new equipment - $38,900 ($20,000 + $18,900).
4. Finally, subtract the annual depreciation expense from the total - $28,900 ($38,900 - $10,000).

The equivalent annual saving from the purchase of the new glueball is $28,900.