Gluon Inc. is considering the purchase of a new high pressure glue-ball. It can purchase the glue-ball for $150,000 and sell its old low pressure glue-ball, which is fully depreciated, for $26,000. The new equipment has a 10-year useful life and will save $34,000 a year in expenses. The opportunity cost of capital is 11% 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 $ _____
Equivalent Annual Savings:
The annual savings from installing new machine after paying all expenses and taking benefit of depreciation tax shield with respect to time value of money in terms as discounting factor.
Answer and Explanation:
Step 1: Initial Cash outlay:
Purchase of new machine= $150,000
Less:Sale of old machine=$26,000
Add: Tax@40% on sale of machine= $10,400
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from Accounting 301: Applied Managerial AccountingChapter 14 / Lesson 3