Two years ago the Krusty Krab Restarant purchased a grill for $50,000. The owner

Question

Two years ago the Krusty Krab Restarant purchased a grill for $50,000. The owner, Eugene Krabs, has learned that a new grill is available that will cook Krabby part ies twice as fast as the existing grill. This new grill can be purchased for $80,000 and would be depreciated straight line over 8 years after which it would have no salvage value. Eugene Krab expects that the new grill will product EBITDA of $50,000 per year for the next eight years while the existing grill products EBITDA of only $35,000 per year. The current grill is being depreciated straight line over its useful life of 10 years after which it will have no salvage value. All other operating expenses are identical for both grills. The existing grill can be sold to another restaurant now for $30,000. The Krusty Krab's tax rate is 35%. The incremental cash flow that the Krusty krab will incur in year 1 if they elect to upgrade to the new grill is closest to: 11,500 7,800 10,800 6,500

Explanation / Answer

A is correct

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