Prudencio Corporation has provided the following information concerning a capital budgeting project: After-tax discount rate 13...
Prudencio Corporation has provided the following information concerning a capital budgeting project:
After-tax discount rate 13 %
Tax rate 30 %
Expected life of the project 4
Investment required in equipment $ 160,000
Salvage value of equipment $ 0
Annual sales $ 400,000
Annual cash operating expenses $ 290,000
One-time renovation expense in year 3 $ 40,000
The company uses straight-line depreciation on all equipment. 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
$12,000
$21,000
$9,000
$33,000
Homework Answers
OPTION: $21000
EXPLANATION:
income tax expense = (annual sales - annual cash operating expenses - depreciation) x 30%
= {$400000 - $290000 - ($160000/4)} x 30%
= $70000 x 30%
= $21000
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