a.) Laurel's Lawn Care Ltd., has a new mower line that can generate revenues of $162,000 per
Question:
a.) Laurel's Lawn Care Ltd., has a new mower line that can generate revenues of $162,000 per year. Direct production costs are $54,000, and the fixed costs of maintaining the lawn mower factory are $22,000 a year. The factory originally cost $1.35 million and is being depreciated for tax purposes over 25 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm's tax bracket is 25%.
b.) Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $210,000 and sell its old low-pressure glueball, which is fully depreciated, for $38,000. The new equipment has a 10-year useful life and will save $46,000 a year in expenses. The opportunity cost of capital is 11%, 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.