Gutshall Corporation is considering a capital budgeting project that would involve investing $240,000 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 $580,000 and the annual incremental cash operating expenses would be $430,000. A one-time renovation expense of $70,000 would be required in year 3. The project would require investing $10,000 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 13%. The company uses straight-line depreciation on all equipment.
The income tax expense in year 3 is:
A)$6,000
B)$45,000
C)$21,000
D)$27,000

Question

Quizplus · Accepted Answer

The income tax expense in year 3 is $6,000. This is calculated as follows:EBIT = $580,000 - $430,000 - $70,000 = $80,000Income tax expense = $80,000 x 30% = $24,000Income tax savings from depreciation = $60,000 x 30% = $18,000Income tax expense in year 3 = $24,000 - $18,000 = $6,000

Gutshall Corporation Is Considering a Capital Budgeting Project That Would