Annala Corporation is considering a capital budgeting project that would require investing $80,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $250,000 and annual incremental cash operating expenses would be $180,000. The project would also require an immediate investment in working capital of $20,000 which would be released for use elsewhere at the end of the project. The company's income tax rate is 30% and its after-tax discount rate is 13%. 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:
A) $75,000
B) $54,000
C) $6,000
D) $15,000

Question

Quizplus · Accepted Answer

The income tax expense in year 2 is calculated as follows: 1. Calculate depreciation: $80,000 / 4 = $20,000 per year.2. Calculate taxable income: Incremental sales ($250,000) - Incremental expenses ($180,000) - Depreciation ($20,000) = $50,000.3. Calculate income tax expense: $50,000 * 30% = $15,000.

Annala Corporation Is Considering a Capital Budgeting Project That Would