Matty's Place is considering the installation of a new computer system that will cut annual operating costs by €11,000.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
ﬁnancial impact of the new computer system on the annual earnings before interest and taxes?

Question

Quizplus · Accepted Answer

To determine the financial impact of the new computer system on the annual earnings before interest and taxes, we need to calculate the annual depreciation expense and subtract it from the annual cost savings.

Annual Depreciation Expense = (Purchase and Installation Cost – Salvage Value) / Useful Life

In this scenario, the purchase and installation cost is €48,000, and the system will be depreciated to zero using straight-line depreciation over a useful life of 5 years. Therefore, annual depreciation expense is:

Annual Depreciation Expense = (€48,000 – 0) / 5 
= €9,600

Annual Cost Savings = €11,000

So, the impact on annual earnings before interest and taxes would be:

Impact on EBIT = Annual Cost Savings – Annual Depreciation Expense 
= €11,000 – €9,600 
= €1,400

Therefore, the best choice is C) €1,400.

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