Lafromboise Corporation has provided the following information concerning a capital budgeting project:

After-tax discount rate 6 %

Tax rate 30 %

Expected life of the project 4

Investment required in equipment $ 240,000

Salvage value of equipment $ 0

Working capital requirement $ 10,000

Annual sales $ 690,000

Annual cash operating expenses $ 490,000

One-time renovation expense in year 3 $ 100,000

The working capital would be required immediately and would be released for use elsewhere at the end of the project.

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

$60,000

$12,000

$42,000

$30,000