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 40%. What is the equivalent annual savings from the purchase if Gluon uses straight-line depreciation? Assume the new machine will have no salvage value. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Equivalent annual savings

Answer 1

Operating cash flow =(Revenues – Cash expenses) × (1 – Tax rate) + (Tax rate × depreciation)=([0 − (–34,000) × (1 – 0.40)+ [0.40 × ($150,000 / 10)

= $26,400

NPV = –Cost new machine +Salvage value of old machine inclusion of taxes + OCF × Presentvalue at The opportunity cost of capital is 11%,

Presentvalue at The opportunity cost of capital is 11%,=26000*(1/r-(1.r(1+r)ⁿ)=26,400 × ((1 / .11) – (1/.11(1 + .11)¹⁰)=155475.725

NPV=–150,000 + 26,000 × (1 – .40)] + 155475.725

NPV=21,075.73

NPV=PMT*Presentvalue at The opportunity cost of capital is 11%,

NPV=PMT*(1 / .11) – (1/.11(1 + .11)¹⁰)

21,075.73=PMT*5.889232

PMT=nnual savings from the purchase=$3578.68904=$3578.69

answered by: anonymous