Stepnoski Corporation is considering a capital budgeting project that would involve investing $280,000 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 $610,000 and the annual incremental cash operating expenses would be $490,000. A one-time renovation expense of $20,000 would be required in year 3. The project would require investing $30,000 of working capital in the project immediately, but this amount would be recovered at the end of the project in 4 years. The company's income tax rate is 30% and its after-tax discount rate is 11%.The company uses straight-line depreciation on all equipment.The income tax expense in year 3 is:
A) $15,000
B) $9,000
C) $7,000
D) $36,000

Question

Quizplus · Accepted Answer

To calculate the income tax expense in year 3, we need to first calculate the taxable income in year 3.

To do this, we need to calculate the annual depreciation expense, which is the initial cost of equipment divided by its useful life:
$280,000/4 = $70,000 per year

In year 3, there is also a one-time renovation expense of $20,000, which we can add to the operating expenses:
$490,000 + $20,000 = $510,000

So, the taxable income in year 3 would be:
$610,000 - $510,000 - $70,000 = $30,000

To calculate the income tax expense, we multiply the taxable income by the income tax rate:
$30,000 x 30% = $9,000

Therefore, the correct answer is B, $9,000.

Stepnoski Corporation Is Considering a Capital Budgeting Project That Would