Question
Your firm is considering a new product development. An outlay of $110,000 is required for equipment, and additional net working capital of $5,000 is required.
Your firm is considering a new product development. An outlay of $110,000 is required for equipment, and additional net working capital of $5,000 is required. Implementing the project will generate a time zero investment tax credit benefit of $3,000 for the firm (i.e. at the beginning of the project). The project is expected to have a 4 year life, and the equipment will be depreciated on a straight line basis to a $10,000 book value. Producing the new product will reduce current manufacturing expenses (costs) by $20,000 annually and increase earnings (revenue) before depreciation and taxes by $23,000 annually. Stantons marginal tax rate is 40 percent. Stanton expects the equipment will have a market salvage value of $15,000 at the end of 4 years.
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