Correll Corporation is considering a capital budgeting project that would requir

ID: 2601673 • Letter: C

Question

Correll Corporation is considering a capital budgeting project that would require investing $258,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $615,000 and annual incremental cash operating expenses would be $447,000. The project would also require a one-time renovation cost of $49,000 in year 3. The company’s income tax rate is 30% 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:

Explanation / Answer

income statement

incremental sales

615000

incremental expenses

447000

incremental revenue

168000

less annual depreciation

258000/4

64500

operating incremental income

103500

less tax 30%

103500*30%

31050

after tax incremental profit

72450

income tax expense in Year 2

31050