Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. gluon inc. is considering the purchase of a new hi

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the...

Free

80.2K

Verified Solution

Question

Finance

Gluon Inc. is considering the purchase of a new high pressureglueball. It can purchase the glueball for $160,000 and sell itsold low-pressure glueball, which is fully depreciated, for $28,000.The new equipment has a 10-year useful life and will save $36,000 ayear in expenses. The opportunity cost of capital is 11%, and thefirm’s tax rate is 40%. What is the equivalent annual savings fromthe purchase if Gluon uses straight-line depreciation? Assume thenew machine will have no salvage value.

Answer & Explanation Solved by verified expert
4.1 Ratings (632 Votes)

Time line 0 1 2 3 4 5 6 7 8 9 10
Proceeds from sale of existing asset =selling price* ( 1 -tax rate) 16800
Tax shield on existing asset book value =Book value * tax rate 0
Cost of new machine -160000
=Initial Investment outlay -143200
Savings 36000 36000 36000 36000 36000 36000 36000 36000 36000 36000
-Depreciation Cost of equipment/no. of years -16000 -16000 -16000 -16000 -16000 -16000 -16000 -16000 -16000 -16000
=Pretax cash flows 20000 20000 20000 20000 20000 20000 20000 20000 20000 20000
-taxes =(Pretax cash flows)*(1-tax) 12000 12000 12000 12000 12000 12000 12000 12000 12000 12000
+Depreciation 16000 16000 16000 16000 16000 16000 16000 16000 16000 16000
=after tax operating cash flow 28000 28000 28000 28000 28000 28000 28000 28000 28000 28000
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
Total Cash flow for the period -143200 28000 28000 28000 28000 28000 28000 28000 28000 28000 28000
Discount factor= (1+discount rate)^corresponding period 1 1.11 1.2321 1.367631 1.5180704 1.6850582 1.8704146 2.07616 2.30454 2.558037 2.839421
Discounted CF= Cashflow/discount factor -143200 25225.225 22725.4281 20473.359 18444.467 16616.637 14969.943 13486.44 12149.9 10945.89 9861.165
NPV= Sum of discounted CF= 21698.49631
EAS 3684.43564
Year or period 0 1 2 3 4 5 6 7 8 9 10
EAS 3684.4356 3684.43564 3684.4356 3684.4356 3684.4356 3684.4356 3684.436 3684.44 3684.436 3684.436
Discount factor= (1+discount rate)^corresponding period 1.11 1.2321 1.367631 1.5180704 1.6850582 1.8704146 2.07616 2.30454 2.558037 2.839421
Discounted CF= Cashflow/discount factor 3319.3114 2990.37062 2694.0276 2427.0519 2186.5332 1969.8498 1774.639 1598.77 1440.337 1297.601
NPV= 21698.49631
EAS is equivalent yearly CF with same NPV = 3684.43564

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Zin AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

Gluon Inc. is considering the purchase of a new high pressureglueball. It can purchase the glueball for $160,000 and sell itsold low-pressure glueball, which is fully depreciated, for $28,000.The new equipment has a 10-year useful life and will save $36,000 ayear in expenses. The opportunity cost of capital is 11%, and thefirm’s tax rate is 40%. What is the equivalent annual savings fromthe purchase if Gluon uses straight-line depreciation? Assume thenew machine will have no salvage value.

Other questions asked by students

Q

Describe what is meant by an electrical double layer (EDL) that occurs at the interface between...

Chemistry
Q

What spin functions are allowed for the inner pair of electrons (1s2) in the 1s22s configuration...

Chemistry
Q

How to solve this question? Write down the steady flow energy equation for an open system control...

Physics
Q

For the results section of a paper which of the following sentences would be the...

Biology
Q

The potential energy of a 2 kg particle free to move along the x axis...

Physics
Q

ppose that the aggregate demand curve crosses the aggregate supply curve in either of the...

Basic Math
Q

The accounting records of Walls China Shop reflected the following balances as of January 1,...

Accounting
Q

How did you get the Pretax income?

Accounting
Q

Gandolfi Construction Co. purchased a CAT 336DL earth mover at a cost of $465,000 in...

Accounting
Q

How long should accounts payable be held before payment is made? please describe briefly.

Accounting
Q

Provide the missing data in the following table for a distributor of martial arts products:...

Accounting
Q

A manufacturing firm has discontinued production of a certain unprofitable product line. ...

Accounting