Gluon Incorporated is considering the purchase of a new high pressure glueball. It can purchase the glueball for $70,000 and sell its old low-pressure glueball, which is fully depreciated, for $12,000. The new equipment has a 10-year useful life and will save $16,000 a year in expenses before tax. The opportunity cost of capital is 9%, and the firm’s tax rate is 21%. What is the equivalent annual saving from the purchase if Gluon can depreciate 100% of the investment immediately.

Gluon Incorporated is considering the purchase of a new high pressure glueball. It can purchase the glueball for $70,000 and sell its old low-pressure glueball, which is fully depreciated, for $12,000. The new equipment has a 10-year useful life and will save $16,000 a year in expenses before tax. The opportunity cost of capital is 9%, and the firm’s tax rate is 21%. What is the equivalent annual saving from the purchase if Gluon can depreciate 100% of the investment immediately.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...

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Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 25%. What is the initial investment outlay? The company spent and expensed $150,000 on research related to the new product last year. What is the initial investment outlay? Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. What is the initial investment outlay?
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