Business

FinanceQ&A LibraryNOTE: You already replied on this question with the answer as indicated below. Unfortunately, the answer is being marked as incorrect. I’m getting that same answer also, that’s why I asked for help in this problem. I can’t figure out what’s missing in the calculation process. Please take another look. Thanks. 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.) Equivalent Annual Savings: $3,935.87Question

Asked Jun 8, 2019

72 views

NOTE: You already replied on this question with the answer as indicated below. Unfortunately, the answer is being marked as incorrect. I’m getting that same answer also, that’s why I asked for help in this problem. I can’t figure out what’s missing in the calculation process. Please take another look. Thanks.

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.)

Equivalent Annual Savings: $3,935.87

Step 1

All financials below are in $.

Initial investment = C_{0} = Purchase cost of new machine – Post tax salvage value of old machine = 140,000 – 24,000 x (1 - 40%) = 125,600

Step 2

Gluon uses straight-line depreciation.

Annual depreciation = Purchase cost of new machine / Life = 140,000 / 10 =14,000

Incremental cash flows, C = (Expenses saved – annual depreciation x (1 – tax rate) + Annual depreciation = (32,000 – 14,000) x (1 – 40%) + 14,000 = 24,800

Step 3

Discount rate = R = 8%

Life of the project, N = 10 years

Hence, NPV = - Initial investment + PV of annual cash flows as annuity = - C0 + ...

Tagged in

Find answers to questions asked by student like you

Show more Q&A

Q: You are head of the Schwartz Family Endowment for the Arts. You have decided to fund an arts school ...

A: Calculation of PV of the Gift:In order to calculate the present value of the gift, it is necessary t...

Q: Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 3.80 percent that s...

A: Calculation of cost of preferred stock:

Q: For example, assume Ethan wants to earn a return of 7.00% and is offered the opportunity to purchase...

A: Calculating the intrinsic value of the bond. We have,Intrinsic value = A / (1+C)1 + A / (1+C)2 + A /...

Q: Kelso Electric is an all-equity firm with 43,250 shares of stock outstanding. The company is conside...

A: As is situation: All equity, no debt, hence no interest payment, ignor taxes.Hence, Net income = EBI...

Q: A company is going public with an offering price of $10 per share. The gross spread is 7 percent. Ho...

A: Offer price, P = $ 10 per shareGross spread, S = 7%Portion received by the bank = P x S = $ 10 / sh...

Q: on B (Use the answer from part a to find these answers. Round to the nearest cent as needed.)

A: P = $ 150,000r = 3% = 0.03n = 12 (months in a year)t = 40 years

Q: Use the continuous compound interest formula to find the indicated value P = $2,570; r = 3.14%; t = ...

A: Continuous Compound Interest Method:The continuous compound interest method is the method of calcula...

Q: Assume that you were recently hired as assistant to Jerry Lehman, financial VP of Coleman Technologi...

A: Note:Since we are entitled to answer up to 3 sub-parts, we shall answer the first 3 as you have not ...

Q: Use the compound interest formula A = P(1 + i)n to find the indicated values A = $6,000; i = 0.03; n...

A: Compounded Interest: It is the method for computing interest at the initial amount of prin...