Maurer Corporation is considering a capital budgeting project that would involve
ID: 2585671 • Letter: M
Question
Maurer Corporation is considering a capital budgeting project that would involve investing $236,000 in equipment with an estimated useful life of 4 years and no salvage value at the end of the useful life. Annual incremental sales from the project would be $640,000 and the annual incremental cash operating expenses would be $494,000. A one-time renovation expense of $58,000 would be required in year 3. The company’s income tax rate is 35%.
The company uses straight-line depreciation on all equipment.
The income tax expense in year 3 is:
Multiple Choice
$30,450
$20,300
$10,150
$51,100
Explanation / Answer
Income tax expense in year 3 is: $10150
Annual Depreciation = $236000 / 4 years = $59000
The renovation costs have neither increased the useful life of the equipment nor have they improved the quantity or quality of the output. Since there is no greater future benefits derived from the renovation costs, the same are expensed out in year 3.
Annual incremental sales $ 640000 Less: Expenses Annual incremental cash operating expense 494000 Annual Depreciation 59000 Renovation expenses 58000 Total expenses 611000 Income before income taxes 29000 Income taxes @ 35% 10150 Net income $ 18850