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Kwik Dogs is considering the installation of a new cooker that will cut annual operating costs...

Kwik Dogs is considering the installation of a new cooker that will cut annual operating costs by $11,900. The system will cost $38,900 and will be depreciated to zero using straight-line depreciation over its five-year life. What is the amount of the earnings before interest and taxes for this project? Ignore bonus depreciation.

$4,120

–$19,680

$5,525

$19,680

–$4,120

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Answer #1

“A penny saved is a penny earned”. So we can consider this annual cost cut as savings or EBITDA, that is Earnings Before Interest, Taxes and Depreciation or Amortization.

When we deduct Depreciation or Amortization from EBITDA we will get EBIT( Earnings Before Interest and Taxes)

Cost of system = $38,900

Depreciation = $38,900 / 5 = $7,780

Savings = $11,900

EBIT = $11,900 - $7,780

= $4,120

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