Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe, that will kill many insect pests but not harm useful pollinators. Buying new equipment to manufacture the product will cost $30 million, and there will be an additional $2 million cost to reconfigure existing plant. The equipment is expected to have a lifetime of nine years and will be depreciated by the straight-line method over its lifetime. The firm expects that they should be able to sell 1,500,000 gallons per year at a price of $54 per gallon. It will take $40 per gallon to manufacture and support the product. If Vernon-Nelson's marginal tax rate is 40%, what are the incremental earnings in year 3 of this project?
Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe, that will kill many insect pests but not harm useful pollinators. Buying new equipment to manufacture the product will cost $30 million, and there will be an additional $2 million cost to reconfigure existing plant. The equipment is expected to have a lifetime of nine years and will be depreciated by the straight-line method over its lifetime. The firm expects that they should be able to sell 1,500,000 gallons per year at a price of $54 per gallon. It will take $40 per gallon to manufacture and support the product. If Vernon-Nelson's marginal tax rate is 40%, what are the incremental earnings in year 3 of this project?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
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Transcribed Image Text:Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe,
that will kill many insect pests but not harm useful pollinators. Buying new equipment
to manufacture the product will cost $30 million, and there will be an additional
$2 million cost to reconfigure existing plant. The equipment is expected to have a
lifetime of nine years and will be depreciated by the straight-line method over its
lifetime. The firm expects that they should be able to sell 1,500,000 gallons per year
at a price of $54 per gallon. It will take $40 per gallon to manufacture and support the
product. If Vernon-Nelson's marginal tax rate is 40%, what are the incremental
earnings in year 3 of this project?
O $17.7 million
O $10.6 million
O $7.1 million
O $21.0 million
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