Rieben Corporation is considering a capital budgeting project that would involve investing $120,000 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 $320,000 and the annual incremental cash operating expenses would be $220,000. A one-time renovation expense of $40,000 would be required in year 3. The company's income tax rate is 30%. The company uses straight-line depreciation on all equipment.
The income tax expense in year 3 is:
A)$9,000
B)$30,000
C)$12,000
D)$21,000

Question

Quizplus · Accepted Answer

The income tax expense in year 3 is $9,000. This is calculated as follows:Depreciation expense = $120,000 / 4 = $30,000EBIT = $320,000 - $220,000 - $30,000 - $40,000 = $30,000Income tax expense = $30,000 x 30% = $9,000

Rieben Corporation Is Considering a Capital Budgeting Project That Would