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Depreciation is a critical concept in accounting, especially when dealing with long-term projects. It is the method by which a company allocates the cost of a tangible asset over its useful life. This allocation allows firms to spread out the expenditure, making their financial statements reflect a more accurate picture of their operations.
For the exercise at hand, we use straight-line depreciation, one of the simplest methods. The asset's value decreases by the same amount each year. Given an initial investment of $420,000 and a project life of three years, the annual depreciation is calculated by dividing the initial cost by the number of years: \[\text{Annual Depreciation} = \frac{420,000}{3} = 140,000\]
This straight-line approach helps ease the impact of depreciation on financial outcomes, providing a steady deduction each year rather than fluctuating charges.

Understanding the distinction between fixed and variable costs is crucial for managing and predicting cash flow in any business operation.
**Fixed Costs** remain constant regardless of the production volume or sales level. In the scenario provided, the fixed costs are \(185,000 annually. This is a necessary cost for running the project, independent of how much is produced or sold.
**Variable Costs**, on the other hand, change in direct relation to the quantity of goods produced. In our case, the variable cost is \)18 per unit. For the sale of 110,000 units, the total variable costs sum up to:\[\text{Total Variable Costs} = 18 \times 110,000 = 1,980,000\]
These costs will fluctuate with changes in production levels, significantly affecting the project's cash flow sensitivity.

Earnings Before Tax (EBT) is an important measure of a company's profitability before tax expenses are deducted. It gives a clearer picture of operational efficiency by isolating income from taxes.
To calculate EBT, we subtract total costs—which are the sum of fixed costs, variable costs, and depreciation—from the total revenues:\[\text{EBT} = \text{Total Revenues} - \text{Total Costs} = 2,860,000 - 2,805,000 = 55,000\]
This figure, $55,000 in our example, reveals the earnings generated purely from operating activities before accounting for taxes. EBT helps in comparative analysis across companies with different tax situations, highlighting potential operational strengths or weaknesses.

Net Income refers to the profit remaining after all deductions, including taxes, have been subtracted from total earnings. It is the final measure of profitability and an important indicator for stakeholders.
To find Net Income, use the Earnings Before Tax (EBT) figure and apply the tax expense using the tax rate given. For this exercise, taxes are calculated at a rate of 34%:\[\text{Taxes} = 55,000 \times 0.34 = 18,700\]Subtracting the tax amount from the EBT gives the net income:\[\text{Net Income} = 55,000 - 18,700 = 36,300\]
This value, $36,300, represents the actual profit available for the business after settling tax obligations. Monitoring net income helps evaluate the true financial health and performance outcomes over time.