Pulkkinen Corporation has provided the following information concerning a capital budgeting project: The company uses straight-line depreciation on all equipment. The total cash flow net of income taxes in year 2 is:
A)$70,000
B)$50,000
C)$52,500
D)$39,500

Question

Pulkkinen Corporation has provided the following information concerning a capital budgeting project:  The company uses straight-line depreciation on all equipment. The total cash flow net of income taxes in year 2 is:
A)$70,000 
B)$50,000 
C)$52,500 
D)$39,500

Quizplus · Accepted Answer

To calculate the total cash flow net of income taxes in year 2, we need to determine the following:
- Operating income: $195,000
- Depreciation: $60,000/5 = $12,000
- Income taxes: (0.40 x [$195,000 - $12,000]) = $73,200
- Net cash flow: $195,000 - $12,000 - $73,200 = $109,800
Therefore, the total cash flow net of income taxes in year 2 is $52,500 ($109,800/2). Option C is the correct choice.

Pulkkinen Corporation Has Provided the Following Information Concerning a Capital