Freiman Corporation is considering investing in a project that would have a 4 year expected useful life. The company would need to invest $160,000 in equipment that will have zero salvage value at the end of the project. Annual incremental sales would be $390,000 and annual cash operating expenses would be $270,000. In year 3 the company would have to incur one-time renovation expenses of $70,000. Working capital in the amount of $10,000 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 income tax expense in year 2 is:
A)$24,000
B)$21,000
C)$36,000
D)$3,000

Question

Quizplus · Accepted Answer

The income tax expense in year 2 is $24,000. This is calculated as follows:EBIT = $390,000 - $270,000 = $120,000Depreciation = $160,000 / 4 = $40,000Taxable income = $120,000 - $40,000 = $80,000Income tax expense = $80,000 * 30% = $24,000

Freiman Corporation Is Considering Investing in a Project That Would