Matty's Place is considering the installation of a new computer system that will cut annual operating costs by $12,000.The system will cost $48,000 to purchase and install.This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation.What is the amount of the earnings before interest and taxes for this project?

Question

Quizplus · Accepted Answer

To calculate the earnings before interest and taxes (EBIT), we need to consider the annual cost savings and the cost of the system.

The annual cost savings are $12,000.

The cost of the system is $48,000, and it will be depreciated over 5 years using straight-line depreciation.

Therefore, the annual depreciation expense is $48,000 / 5 = $9,600.

To calculate EBIT, we subtract the annual cost savings and the annual depreciation expense from the annual revenue:

EBIT = Revenue - Cost Savings - Depreciation Expense

Since there is no information about the revenue, we assume it is equal to the cost savings:

EBIT = $12,000 - $12,000 - $9,600 = -$9,600

Therefore, the best choice is C) -$9,600.

Matty's Place Is Considering the Installation of a New Computer