8) CathFoods will release a new range of candies which contain anti-oxidants. New equipment tomanufacture the candy will cost $4 million, which will be depreciated by straight-linedepreciation over six years. In addition, there will be $5 million spent on promoting the newcandy line. It is expected that the range of candies will bring in revenues of $6 million per yearfor five years with production and support costs of $1.5 million per year. If CathFoods' marginaltax rate is 35%, what are the incremental earnings in the second year of this project?A) $2.492 millionB) $2.100 millionC) $3.833 millionD) $1.342 millionAnswer: AExplanation: Depreciation = 4/6= $0.66666667 million; earnings beforetax $6-$1.5- $0.66666667= $3.83333333 million;earnings after tax-$3.83333333 x 0.65-$2.492 million.Diff: 1 Var: 12Skill: AnalyticalAACSB Objective: Analytic Skills

Incremental earnings are a critical concept in financial analysis and decision-making. They…

Answered: 8) CathFoods will release a new range…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 13P

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