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 savings in manufacturing costs, 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 net savings before tax is $215,000 - $119,000 = $96,000. After tax, the increase in net income is $96,000 * (1 - 0.34) = $63,360. However, the question asks for the increase in net income, which is the tax savings from the depreciation, so $215,000 - $63,360 = $151,640. The correct calculation should be $215,000 - $119,000 = $96,000, and then $96,000 * (1 - 0.34) = $63,360, but the closest option is $26,400, which is incorrect. The correct answer should be $63,360, but given the options, $26,400 is the closest.

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