Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-S

Question

Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe, that will kill many insect pests but not harm useful pollinators. Buying new equipment to manufacture the product will cost $20 million. The equipment is expected to have a lifetime of eight years and will be depreciated by the straight-line method over its lifetime. The firm expects that they should be able to sell 1,500,000 gallons per year at a price of $52 per gallon. It will take $38 per gallon to manufacture and support the product. If Vernon-Nelson's marginal tax rate is 40%, what are the incremental earnings in year 3 of this project? Question 9 options: A) $10.5 million B) $11.1 million C) $12.6 million D) $18.5 million

Explanation / Answer

depriciation per year = 20000000/8 = 2500000

EBIT = 1500000 *(52-38) = 21000000

incremental earnings in year 3

= (21000000 - 2500000) *(1-0.4)

= 11.1 million

answer is B)

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