Use the Information for the Question(s)below

question 19

Multiple Choice

Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years.The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0.
The cane manufacturing machine will result in sales of 2000 canes in year 1.Sales are estimated to grow by 10% per year each year through year three.The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant.The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts.It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash,4% of its annual sales in accounts receivable,9% of its annual sales in inventory,and 6% of its annual sales in accounts payable.The firm is in the 35% tax bracket,and has a cost of capital of 10%.
-The depreciation tax shield for the Sisyphean Corporation's project in the first year is closest to:

• A)$8000
• B)$3500
• C)$2800
• D)$5200

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Definitions:

Diminishing Returns

The principle stating that as one factor of production is increased while others are held constant, a point will eventually be reached where additions of the factor yield progressively smaller increases in output.

Value Added

The increase in worth of a product or service as a result of a particular stage of production or as it moves through the supply chain.

Marginal Product

The increase in output resulting from a one-unit increase in the amount of a single input used, keeping all other inputs constant.

Premium

A premium is the amount paid for an insurance policy, representing the price for the insurance coverage or the amount over the nominal value of something.