Fontana Corporation is considering a capital budgeting project that would require investing $240,000 in equipment with an expected life of 4 years and zero salvage value. The annual incremental sales would be $640,000 and the annual incremental cash operating expenses would be $440,000. The company's income tax rate is 30%. The company uses straight-line depreciation on all equipment.The total cash flow net of income taxes in year 2 is:
A) $158,000
B) $200,000
C) $88,000
D) $140,000

Question

Quizplus · Accepted Answer

The total cash flow net of income taxes in year 2 can be calculated as follows:1. Calculate the annual depreciation: $240,000 / 4 years = $60,000 per year.2. Calculate the operating income before taxes: $640,000 (sales) - $440,000 (expenses) - $60,000 (depreciation) = $140,000.3. Calculate the income tax: $140,000 * 30% = $42,000.4. Calculate the net operating income after taxes: $140,000 - $42,000 = $98,000.5. Add back the depreciation (since it's a non-cash expense) to get the total cash flow: $98,000 + $60,000 = $158,000.Therefore, the total cash flow net of income taxes in year 2 is $158,000.

Fontana Corporation Is Considering a Capital Budgeting Project That Would