CathFoods will release a new range of candies which contain anti-oxidants. New e

Question

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. 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 10 options: A) $1.365 million B) $1.500 million C) $1.753 million D) $2.100 million

Explanation / Answer

A) $1.365 million

Depreciation = 2 / 5 = 0.4
Earning before tax = 4 - 1.5 - 0.4 = 2.1
Earning after tax = 2.1 * (1-0.35) = 1.365

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