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 amount of the earnings before interest and taxes for this project?

Question

Quizplus · Accepted Answer

Firstly, we need to calculate the annual depreciation expense:
Depreciation expense = Total cost / Useful life
Depreciation expense = $48,000 / 5 years = $9,600 per year

Next, we can calculate the annual net savings from operating costs:
Annual net savings = Annual operating cost reduction - annual depreciation expense
Annual net savings = $11,000 - $9,600 = $1,400

Finally, we can calculate the earnings before interest and taxes (EBIT):
EBIT = Annual net savings - Depreciation expense
EBIT = $1,400 - $9,600 = -$8,200

Therefore, the correct answer is C ($1,400).

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