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 total cash flow net of income taxes in year 2 is:
A)$92,000
B)$28,000
C)$120,000
D)$80,000

Question

Quizplus · Accepted Answer

The correct answer is A. The total cash flow net of income taxes in year 2 is $92,000. This is calculated as follows:Incremental sales: $440,000Incremental cash operating expenses: $320,000Depreciation: $160,000 / 4 = $40,000Income before taxes: $80,000Income taxes (35%): $28,000Net income: $52,000Add back depreciation: $40,000Total cash flow net of income taxes: $92,000

Mitton Corporation Is Considering a Capital Budgeting Project That Would