The Wolf's Den Outdoor Gear is considering replacing the equipment it uses to produce tents. The equipment would cost $1.4 million and lower manufacturing costs by an estimated $215,000 a year. The equipment will belong in a 25% CCA class. The required rate of return is 13% and the tax rate is 34%. What is the increase in net income in the first year from this proposed project?

Question

Quizplus · Accepted Answer

The increase in net income is calculated by taking the cost savings, subtracting the tax shield from depreciation, and then applying the tax rate. The depreciation for the first year is $1.4 million * 25% = $350,000. The tax shield is $350,000 * 34% = $119,000. The increase in net income is ($215,000 - $119,000) * (1 - 0.34) = $26,400.

The Wolf's Den Outdoor Gear Is Considering Replacing the Equipment