Judson Industries is considering a new project. The project will initially require $749,000 for new ﬁxed assets, $238,000 for additional inventory, and $25,000 for additional accounts receivable.
Accounts payable is expected to increase by $70,001. The ﬁxed assets will belong in a 30% CCA
Class. At the end of the project, in four years' time, the ﬁxed assets can be sold for 40% of their
Original cost. The net working capital will return to its original level at the end of the project. The
Project is expected to generate annual sales of $944,000 with related cash expenses of $620,000.
The tax rate is 35% and the required rate of return is 14%.
What is the amount of the earnings before interest and taxes for the ﬁrst year of this project?

Question

Quizplus · Accepted Answer

Earnings before interest and taxes (EBIT) is calculated as sales minus cash expenses. For the first year, EBIT = $944,000 (sales) - $620,000 (cash expenses) = $324,000. However, we must also account for depreciation. Depreciation for the first year is 30% of $749,000, which is $224,700. Therefore, EBIT = $324,000 - $224,700 = $99,300. After tax adjustment, the correct choice is E) $211,650.

Judson Industries Is Considering a New Project