Credit Corporation has provided the following information concerning a capital b
ID: 2498555 • Letter: C
Question
Credit Corporation has provided the following information concerning a capital budgeting project:
Investment required for equipment $80,000
Expected life of the project 4
Salvage value of equipment $0
Annual sales $250,000
Annual cash operating expenses $180,000
One-time renovation expense in year 3 $20,000
The company's income tax rate is 30% and its after-tax discount rate is 15%. The company uses straight-line depreciation on all equipment. 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:
$15,000
$6,000
$9,000
$21,000
$15,000
$6,000
$9,000
$21,000
Explanation / Answer
Annual sales. =$2,50,000
(-)Annual cash operating expense. =$1,80,000
(-)Depreciation. =$ 20,000
Thus,Profit before tax. = $50,000
Taxrate =30%
Thus income tax expenses for 2nd year =50,000 *30%
=$15,000
Note-
Depreciation =(80,000-0)/4
=$20,000 per year
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