Explore BrainMass
Share

Explore BrainMass

    Equivalent annual savings

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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 $________________

    © BrainMass Inc. brainmass.com October 10, 2019, 8:17 am ad1c9bdddf
    https://brainmass.com/business/discounted-cash-flows-model/equivalent-annual-savings-617707

    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 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 $________________

    $2.19