Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $190,000 and sell its old low- pressure

image text in transcribed
image text in transcribed
Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $190,000 and sell its old low- pressure glueball, which is fully depreciated, for $34,000. The new equipment has a 10-year useful life and will save $42,000 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. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Equivalent annual savings Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.4 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $668,000. The firm believes that working capital at each date must be maintained at a level of 15% of next year's forecast sales. The firm estimates production costs equal to $1.60 per trap and believes that the traps can be sold for $6 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 35%, and the required rate of return on the project is 9%. Use the MACRS depreciation schedule. Thereafter Year: Sales (millions of traps) 0.6 0.8 1.0 1.0 0.9 0.6 a. What is project NPV? (Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.) NPV million b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? (Do not round intermediate calculations. Enter your answer in whole dollars not in millions.) The NPV increases by

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals Of Institutional Asset Management

Authors: Frank J Fabozzi, Francesco A Fabozzi

1st Edition

9811220034, 9789811220036

More Books

Students also viewed these Finance questions

Question

What would the profession expect of Principal Smith?

Answered: 1 week ago

Question

Is money the prime driver of employee performance?

Answered: 1 week ago