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Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $140,000 and sell its old low-pressure glueball, which is fully depreciated, for $24,000. The new equipment has a 10-year useful life and will save $32,000 a year in expenses. The opportunity cost of capital is 8%, 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.)

Question

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $140,000 and sell its old low-pressure glueball, which is fully depreciated, for $24,000. The new equipment has a 10-year useful life and will save $32,000 a year in expenses. The opportunity cost of capital is 8%, 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.)

check_circleAnswer
Step 1

Calculation of Annual Depreciation Tax Shield:

Cos t of Glueball
x Tax Rate
Annual Depreciation
Number of Years
$140,000x40%
10
$5,600
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Cos t of Glueball x Tax Rate Annual Depreciation Number of Years $140,000x40% 10 $5,600

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Step 2

Calculation of Present Value of Purchase:

f PV(B3,B4,-B2,-B1)
B5
A
1 Cost of Glueball |$140,000
2 Depreciation
3 Interest Rate
4 Number of Years
$5,600
8%
10
5 PV of Purchase s102,423.54
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f PV(B3,B4,-B2,-B1) B5 A 1 Cost of Glueball |$140,000 2 Depreciation 3 Interest Rate 4 Number of Years $5,600 8% 10 5 PV of Purchase s102,423.54

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Step 3

Calculation of Equivalent Annual Cost:

...
PMT(B2,B3-B1,0)
B4
В
PV of Purchase
1
$102,423.54
2 Interest Rate
8%
Number of Years
3
10
Equivalent Annual Cost
$15,264.13
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PMT(B2,B3-B1,0) B4 В PV of Purchase 1 $102,423.54 2 Interest Rate 8% Number of Years 3 10 Equivalent Annual Cost $15,264.13

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