Kellog Corporation is considering a capital budgeting project that would have a useful life of 4 years and would involve investing $160,000 in equipment that would have zero salvage value at the end of the project. Annual incremental sales would be $390,000 and annual cash operating expenses would be $260,000. The company uses straight-line depreciation on all equipment. Its income tax rate is 35%. The income tax expense in year 2 is:
A)$7,000
B)$45,500
C)$31,500
D)$24,500

Question

Quizplus · Accepted Answer

The income tax expense is calculated as (Incremental Sales - Cash Operating Expenses - Depreciation) * Tax Rate. Depreciation is $160,000/4 = $40,000. Taxable income = $390,000 - $260,000 - $40,000 = $90,000. Tax expense = $90,000 * 35% = $31,500.

Kellog Corporation Is Considering a Capital Budgeting Project That Would