The Wolf\'s Den Outdoor Gear is considering replacing the equipment it uses to p

Question

The Wolf's Den Outdoor Gear is considering replacing the equipment it uses to produce tents. The
equipment would cost $1.4 million and lower manufacturing costs by an estimated $215,000 a year. The
equipment will be depreciated using straight-line depreciation to a book value of zero. The life of the
equipment is 8 years. The required rate of return is 13% and the tax rate is 34%. What is the net income
from this proposed project?
A. $13,600
B. $26,400
C. $32,400
D. $40,000
E. $53,600

Please show me the steps.

Explanation / Answer

Value of equipment = $1,400,000

Under the SLM method depreciation per year = $175,000

Depreciation amount post tax = $175,000 (1-0.34) = $115,000

Savings in manufacturing costs = $215,000. Net savings (savings - depreciation) = 215,000 - 175,000 = $40,000 per year

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