Mitton Corporation is considering a capital budgeting project that would require investing $160,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $440,000 and annual incremental cash operating expenses would be $320,000. The project would also require a one-time renovation cost of $0 in year 3. The company's income tax rate is 35% and its after-tax discount rate is 12%. 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:
A)$14,000
B)$112,000
C)$28,000
D)$154,000

Question

Quizplus · Accepted Answer

The income tax expense in year 2 is calculated by first determining the taxable income: Incremental sales ($440,000) - Incremental cash operating expenses ($320,000) - Depreciation ($40,000, which is $160,000/4 years) = $80,000. The tax expense is then $80,000 * 35% = $28,000.

Mitton Corporation Is Considering a Capital Budgeting Project That Would