Schroeder Electronics Is Considering a Project Which Will Require the Purchase

question 12

Multiple Choice

Schroeder Electronics is considering a project which will require the purchase of $5 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 5-year life of the project. Schroeder's expects to sell the equipment at the end of the project for 10% of its original cost. Annual sales from this project are estimated at $2.3 million. Net working capital equal to 10% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. Schroeder desires a 12% rate of return on this project. The tax rate is 40%. What is the value of the depreciation tax shield in year 2 of the project?

• A) $134,000
• B) $240,000
• C) $334,000
• D) $400,000
• E) $1,000,000

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Definitions:

Unconditioned Stimulus

A stimulus that naturally and automatically triggers a response without the need for prior learning.

Meat Powder

Finely ground meat used in classical conditioning experiments, notably by Ivan Pavlov, as a stimulus to elicit salivation in dogs.

Salivate

To salivate means to produce saliva, often in anticipation of food or in response to its presence, characterized by the physiological process of digestion.

Salivation in Dogs

An automatic response that occurs in dogs when they anticipate food, famously studied by Pavlov in his classical conditioning experiments.