Question
Gutshall Corporation is considering a capital budgeting project that would involve investing $160,000 in equipment with an estimated useful life of 4 years and no
Gutshall Corporation is considering a capital budgeting project that would involve investing $160,000 in equipment with an estimated useful life of 4 years and no salvage value at the end of the useful life. Annual incremental sales from the project would be $640,000 and the annual incremental cash operating expenses would be $500,000. A one-time renovation expense of $40,000 would be required in year 3. The project would require investing $12,000 of working capital in the project immediately, but this amount would be recovered at the end of the project in 4 years. The company's income tax rate is 30% and its after-tax discount rate is 14%.
The company uses straight-line depreciation on all equipment.
The income tax expense in year 3 is:
A. $18,000
B. $42,000
C. $26,400
D. $30,000
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