Question

Correll Corporation is considering a capital budgeting project that would require investing $254,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $605,000 and annual incremental cash operating expenses would be $441,000. The company’s income tax rate is 30% and its after-tax discount rate is 15%. 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:

Multiple Choice

• $30,150

• $14,275

• $15,875

• $47,625

Answer 1

Calculation:

income statement
incremental sales		605000
incremental expenses		441000
incremental revenue		164000
less annual depreciation	254000/4	63500
operating incremental income		100500
less tax 30%	100500*30%	30150
after tax incremental profit		70350
income tax expense in Year 2		30150

Therefore, option $30,150 is correct.