Appendix 8C) Folino Corporation is considering a capital budgeting project that

Question

Appendix 8C) Folino Corporation is considering a capital budgeting project that would require investing $120,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $380,000 and annual incremental cash operating expenses would be $300,000. The project would also require an immediate investment in working capital of $10,000 which would be released for use elsewhere at the end of the project. The project would also require a one-time renovation cost of $30,000 in year 3. The company's income tax rate is 35% and its after-tax discount rate is 15%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting. The income tax expense in year 2 is:

$17,500

$7,000

$28,000

$10,500

Explanation / Answer

In the Year 2, Incremental Sales = $ 380,000

Less: Incremental Expenses = $ 300,000

Less: Depreciation (120000/4) = $ 30,000

Incremental Profit = $ 50,000

Tax at 35% rate = $ 50,000 * 35 / 100 = $ 17,500

The Answer, Income tax expense in year 2 = $ 17,500

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.