CathFoods will release a new range of candies which contain anti-oxidants. New equipment to manufacture the candy will cost $4 million, which will be depreciated by straight-line depreciation over six years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of $6 million per year for five years with production and support costs of $1.5 million per year. If CathFood's marginal tax rate is 35%, what are the incremental earnings in the second year of this project?

Question

Quizplus · Accepted Answer

The incremental earnings in the second year are calculated as follows: Revenue ($6 million) minus production and support costs ($1.5 million) minus depreciation ($4 million / 6 years = $0.667 million) equals $3.833 million. After tax (35%), the earnings are $3.833 million * (1 - 0.35) = $2.492 million.

CathFoods Will Release a New Range of Candies Which Contain