Nakama Corporation is considering investing in a project that would have a 4 year expected useful life. The company would need to invest $280,000 in equipment that will have zero salvage value at the end of the project. Annual incremental sales would be $640,000 and annual cash operating expenses would be $480,000. In year 3 the company would have to incur one-time renovation expenses of $50,000. Working capital in the amount of $20,000 would be required. The working capital would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. The company's tax rate is 30%. The income tax expense in year 2:
A) $48,000
B) $12,000
C) $14,500
D) $27,000

Question

Quizplus · Accepted Answer

Depreciation expense = (Original cost - Salvage value) ÷ Useful life
= ($280,000 - $0) ÷ 4 years = $70,000 per year
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Nakama Corporation Is Considering Investing in a Project That Would