Margarite's Enterprises Is Considering a New Project

question 62

Multiple Choice

Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed assets, $160,000 for additional inventory and $35,000 for additional accounts receivable.
Accounts payable is expected to increase by $100,000 and long-term debt is expected to increase
By $300,001. The project has a 5-year life. The fixed assets will belong in a 30% CCA class. At the
End of the project, the fixed assets can be sold for 25% of their original cost. The net working
Capital returns to its original level at the end of the project. The project is expected to generate
Annual sales of $554,000 and costs of $430,000. The tax rate is 35% and the required rate of
Return is 15%.
What is the amount of the earnings before interest and taxes for the first year of this project?

• A) $38,500
• B) $59,000
• C) $67,000
• D) $75,250
• E) $159,000

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Definitions:

Residual Income

The income that remains after deducting all required costs of capital from the operating income.

Imputed Interest

The interest that is considered or assumed to be charged on an interest-free loan or bond, often for tax calculations.

Residual Income

The income that remains after subtracting all the costs of capital from the net operating income.

Net Operating Income

Earnings before interest and taxes (EBIT), a measure of a company's profitability from operations.