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Celsius Corp. is conducting a capital budgeting analysis to decide whether to invest in a new project which has an expected life of 5 years.

Celsius Corp. is conducting a capital budgeting analysis to decide whether to invest in a new project which has an expected life of 5 years. The following information is available:

  • The installed cost of the new equipment is $360,000. Installation will cost an additional $40,000 The equipment will be depreciated using 5-year MACRS depreciation over the 5-year life of the project.
  • An initial NOWC investment equal to 10 percent of year 1 sales will also be required.
  • The equipment is expected to have a salvage value of $80,000 at the end of the project's life.
  • Forecasted sales in year 1 is $600,000 with a gross margin (excluding depreciation) of 40%. Sales is expected to increase 5% per year over the 5-year life of the project.
  • Additional NOWC investments equal to 10 percent of the expected increase in sales will also be required each year.
  • Interest expense from a loan used to finance the project will result in annual interest payments of $28,000 each year over the 5-year life of the project.
  • Celsius has a 21% corporate tax rate.

What is the depreciation expense in year 3 for the project?

Select one:

a. $58,960

b. $65,120

c. $76,800

d. $92,500

e. none of the above

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