The Wolf's Den Outdoor Gear is considering replacing the equipment it uses to produce tents.The equipment would cost $1.2 million and lower manufacturing costs by an estimated $225,000 a year.The equipment will be depreciated using straight-line depreciation to a book value of zero.The life of the equipment is 6 years.The required rate of return is 13% and the tax rate is 34%.What is the net income from this proposed project?

Question

Quizplus · Accepted Answer

The correct answer is A. The net income from this proposed project is $16,500. This is calculated as follows:EBIT = $225,000Depreciation = $1.2 million / 6 = $200,000Taxable income = $225,000 - $200,000 = $25,000Taxes = $25,000 * 34% = $8,500Net income = $25,000 - $8,500 = $16,500

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