CathFoods will release a new range of candies which contain anti-oxidants.New equipment to manufacture the candy will cost $2 million,which will be depreciated by straight-line depreciation over five 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 $4 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:  1. Revenue: $4 million  2. Costs: $1.5 million  3. Depreciation: $2 million / 5 years = $0.4 million  4. Earnings Before Tax (EBT): $4 million - $1.5 million - $0.4 million = $2.1 million  5. Tax: 35% of $2.1 million = $0.735 million  6. Incremental Earnings: $2.1 million - $0.735 million = $1.365 million

CathFoods Will Release a New Range of Candies Which Contain