Schroeder Electronics Is Considering a Project Which Will Require the Purchase

Multiple Choice

Schroeder Electronics is considering a project which will require the purchase of $5 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 5-year life of the project. Schroeder's expects to sell the equipment at the end of the project for 10% of its original cost. Annual sales from this project are estimated at $2.3 million. Net working capital equal to 10% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. Schroeder desires a 12% rate of return on this project. The tax rate is 40%. What is the value of the depreciation tax shield in year 2 of the project?

A) $134,000
B) $240,000
C) $334,000
D) $400,000
E) $1,000,000