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Matty's Place is considering the installation of a new computer system that will cut annual operating...

Matty's Place is considering the installation of a new computer system that will cut annual operating costs by $12,000. The system will cost $42,000 to purchase and install. This system is expected to have a life of 5 years and will be depreciated to zero using straight-line depreciation. Ignore bonus depreciation. What is the amount of the earnings before interest and taxes for each year of this project if the tax rate is 21 percent? Multiple Choice −$20,400 $5,400 $3,600 $12,000 $8,400

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Answer #1

Earnings before interest and taxes = $3600

Explanation;

Earnings before interest and taxes will be calculated as follow;

Annual saving in operating costs = $12000

Annual depreciation ($42000 / 5) = $8400

Hence, Earnings before interest and taxes ($12000 – $8400) = $3600

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