Problem: Gluon Inc. is considering the purchase of a new high pressure glue ball. It can purchase the glue ball for $20,000 and sell its old low-pressure glue ball, which is fully depreciated, for $3,000. The new equipment has a 10-year useful life and will save $5,000 a year in expenses. The opportunity cost of capital is 12%, 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.
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