Use the following information to answer the question(s) below Two years ago the
ID: 2631300 • Letter: U
Question
Use the following information to answer the question(s) below Two years ago the Krusty Krab Restaurant purchased a grill foe $50,000. The owner, Eugene Krabs, has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill. This new grill can be purchased for $80,000 and would be deprecated straight line over 8 years, after which it would have no salvage value. Eugene Krab expects that the new grill will produce EBITDA of $50,000 per year for the next eight years while the existing grill products EBITDA of only $35,000 per year. The current grill is being depreciated straight line over its useful life of 10 years after which it will have no salvage value. All other operating expenses are identical for both grils. The existing grill can be sold to another restaurant now for $30,000. The Krusty Krab's tax rate is 35%. The incremental cash flow that the Krusty Krab will incur in year 1 if they elect to upgrade to the new grill is closest to: 11,500 7,800 10,800 6,500Explanation / Answer
Answer is A) 11500 Incremental savings post tax- 15000 * 0.65 9750 tax savings on depreciation - 5000*0.35 1750 11500 50000 old machine depre 5000 80000 new machine depre 10000 Incremental depre 5000