Hinger 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 $350,000 and annual incremental cash operating expenses would be $250,000. 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 $40,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 11%. 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 total cash flow net of income taxes in year 2 is:
A) $49,000
B) $100,000
C) $79,000
D) $70,000

Question

Quizplus · Accepted Answer

To calculate the cash flow net of income taxes in year 2, we need to calculate the total cash inflows and outflows for year 2 and then subtract the income tax expense.

Total cash inflows in year 2:
Incremental sales - incremental cash operating expenses = $350,000 - $250,000 = $100,000

Total cash outflows in year 2:
Depreciation expense = ($120,000 - 0) / 4 = $30,000
Income tax expense = ($100,000 - $30,000 - $10,000) x 30% = $18,000

Cash flow net of income taxes in year 2:
$100,000 - $30,000 - $18,000 = $52,000

Therefore, the correct choice is C) $79,000 (since $52,000 is the cash flow net of income taxes in Year 2, which is ahead of Year 3's renovation cost.)

Hinger Corporation Is Considering a Capital Budgeting Project That Would