Folino Corporation is considering a capital budgeting project that would require
ID: 2472677 • Letter: F
Question
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
$17,500
$7,000
$28,000
$10,500
Explanation / Answer
Answer. $17500 Depreciation on Equipment = 120000 / 4 Years = $30000 per annum Calculation of Income Tax Expense in Year 2 Annual Sales 380,000 Less: Annual Cash operating exp. (300,000) Cash Operating Income 80,000 Less: dep. On Equipment (30,000) Net Income 50,000 Income Tax - 35% 17,500