Sway's Market Is Considering a Project That Will Require the Purchase

question 3

Multiple Choice

Sway's Market is considering a project that will require the purchase of $1.4 million in new equipment.The equipment will be depreciated straight-line to zero over the 5-year life of the project.The firm expects to sell the equipment at the end of the project for 20 percent of its original cost.New net working capital equal to 10 percent of sales will be required to support the project.All of the new net working capital will be recouped at the end of the project.Annual sales are estimated at $750,000 with costs of $338,000.The required rate of return is 12 percent and the tax rate is 34 percent.
What is the value of the depreciation tax shield in Year 2 of the project?

• A)$68,800
• B)$74,000
• C)$95,200
• D)$280,000
• E)$184,800

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Definitions:

Earnings

The profit a company generates over a specific period, indicating its financial performance.

EPS

Earnings Per Share, a key financial metric that divides a company's profit by the number of its outstanding shares of common stock.

Business Risk

Refers to the potential threats to a company's operations or profitability that arise from internal or external factors.

Financial Leverage

The use of borrowed funds with the aim to increase the returns on equity by financing projects with debt rather than equity.