Purchase Solution

Equivalent annual savings

Not what you're looking for?

Ask Custom Question

Hi,

Please help me with the question below. I am not sure what I am missing, my answer is not coming out right.

Question below:

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $220,000 and sell its old low-pressure glueball, which is fully depreciated, for $40,000. The new equipment has a 10-year useful life and will save $48,000 a year in expenses. The opportunity cost of capital is 10%, 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 $________________

Purchase this Solution
Solution Summary

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $220,000 and sell its old low-pressure glueball, which is fully depreciated, for $40,000. The new equipment has a 10-year useful life and will save $48,000 a year in expenses. The opportunity cost of capital is 10%, 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 $________________

Solution Preview

Solution:

Step 1: To compute the annual after-tax cash flows

Initial investment in year 0:
Purchase cost of new equipment $(220,000)
Less: After-tax salvage value of old equipment $24,000
[$40,000 * (1-.40)]
Net cash outflow in Year 0 $(196,000)

Annual operating cash flows: Years 1 till ...

Solution provided by:
Radhika Lakshmi, MPhil
Education
  • MPhil, Madurai Kamaraj University
  • MCom, Annamalai University
  • IATA, International Air Transport Association
Recent Feedback
  • "Great explanations on how the answers were obtained."
  • "Love the way she explains everything step by step."
  • "Solutions were thoroughly explained."
  • "Excellent explanations of how problems are solved"
  • "Thanks"
Purchase this Solution
Free BrainMass Quizzes
Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

View More Free Quizzes
Related BrainMass Solutions

  • equivalent annual worth

    At an interest rate of 8% per year, what is the equivalent annual worth (years 1-8) of the projected savings.

  • Replacement Decision- Unequal Lives

    Annual cash flow Equivalent annual cash flow= $5,723 =22256/3.888668 Equivalent Annual Cash Flows: Machine 190-3= $5,161 Machine 360-6= $5,723 Since Machine 360-6 has a higher Equivalent Annual Cash flow Select Machine

  • Higher sales OR lower cost - Target Company

    the reward is the equivalent of 10% of the annual savings. Arman Khodadoost introduced an idea where requisitioning in and out of the warehouse would be eliminated. Workers would go to the warehouse and grab what the production needs.

  • Present value purchase decision

    (c) If they choose to deposit 5 equal end-of-year amounts in the savings account in order to pay in full for the SUV 5 years from now, what will be the equivalent annual worth? (d) What is the equivalent present value of the SUV?

  • Joanna's computations at ABC Bank; HECS liability

    At the end of the second year after graduation Kym's annual taxable income has increased to $29,000 and he is required by the tax office to pay an amount equivalent to 1% of his annual taxable income to reduce his HECS debt.

  • P-2: Ivan Rice is a new accountant with Wertz Company

    Calculate the annual rate of interest that this is equivalent to. (a) There is no doubt that Ivan should pay the invoice in time to receive the discount. We can assess the difference by first calculating the discount amount: $6000 x 2% = $120.

  • Calculating the EOQ and various inventory costs

    savings, hospital should not order as per EOQ.

  • Start Up Company Finance Calculations

    If phase I savings occur in years 0, 1, 2 and 3 and phase II occurs in years 4 through 10, what is the equivalent annual worth of the upgraded system in years 1 through 10 at an interest rate of 8% per year?

  • Percents and fractions

    10) this is a compounding problem: The price at the end of sixth year: $1.35(1+11%)^6 = $2.53 17) The annual yield of The New Age Savings Bank is (1 + 4%/365)^365 - 1 in this expression, "1" represents the principle.

View More Related Solutions