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

ID: 2645692 • Letter: V

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, and there will be an additional $2 million cost to reconfigure existing plant 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 $.18 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?

Explanation / Answer

No of Units sold

                                1,500,000

Selling Price per unit

                                               52

Less Cost per unit

                                               38

Cash Profit Per unit

                                               14

New Equipment

EBITDA

$                     21,000,000.00

(1,5000,000*14)

Less Depreciation

$                       2,500,000.00

(20000000/8)

Earning before Tax

$                     18,500,000.00

Less Tax @ 40 %

$                       7,400,000.00

Incremental Earning

$                     11,100,000.00

No of Units sold

                                1,500,000

Selling Price per unit

                                               52

Less Cost per unit

                                               38

Cash Profit Per unit

                                               14

New Equipment

EBITDA

$                     21,000,000.00

(1,5000,000*14)

Less Depreciation

$                       2,500,000.00

(20000000/8)

Earning before Tax

$                     18,500,000.00

Less Tax @ 40 %

$                       7,400,000.00

Incremental Earning

$                     11,100,000.00