Matty's Place is considering the installation of a new computer system that will cut annual operating costs by $12,000.The system will cost $42,000 to purchase and install.This system is expected to have a life of 5 years and will be depreciated to zero using straight-line depreciation.Ignore bonus depreciation.What is the amount of the earnings before interest and taxes for each year of this project if the tax rate is 21 percent?
A)−$20,400
B)$5,400
C)$3,600
D)$12,000
E)$8,400

Question

Quizplus · Accepted Answer

To calculate the earnings before interest and taxes (EBIT) for each year, we need to first calculate the annual depreciation expense.

Total depreciation = Cost of computer system / useful life
Total depreciation = $42,000 / 5
Total depreciation = $8,400 per year

Next, we can calculate the annual savings from the new system:

Annual savings = $12,000

So, the EBIT for each year can be calculated as follows:

Year 1: 
EBIT = Annual savings - Depreciation expense - Taxes
EBIT = $12,000 - $8,400 - ($12,000 - $8,400) x 21%
EBIT = $3,600

Year 2-5:
EBIT = Annual savings - Depreciation expense - Taxes
EBIT = $12,000 - $8,400 - ($12,000 - $8,400) x 21%
EBIT = $3,600

Therefore, the EBIT for each year of the project is $3,600, and the best choice is option C.

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