Schroeder Electronics Is Considering a Project Which Will Require the Purchase

question 6

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:

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An approach focusing on adhering to rules, regulations, and standards to avoid legal or regulatory penalties.

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An approach or stance focusing on principles or standards of behavior; what is important in life.

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A measure of a company's profitability, financial health, and the effectiveness of its management, as reflected in its financial records and reports.

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