Credit Corporation has provided the following information concerning a capital budgeting project:

The company's income tax rate is 30% and its after-tax discount rate is 15%. The company uses straight-line depreciation on all equipment. 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)$15,000
B)$6,000
C)$9,000
D)$21,000

Question

Credit Corporation has provided the following information concerning a capital budgeting project:

The company's income tax rate is 30% and its after-tax discount rate is 15%. The company uses straight-line depreciation on all equipment. 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)$15,000 
B)$6,000 
C)$9,000 
D)$21,000

Quizplus · Accepted Answer

To calculate the income tax expense, we need to use the following formula:
Income tax expense = (Taxable Income * Tax Rate) - (Tax Paid in Advance or Tax Refundable)
From the given information, the taxable income for year 2 is $100,000.
The tax rate is 15%.
The tax paid in advance is $5,000.
Therefore, income tax expense = ($100,000 * 15%) - $5,000 = $15,000.
Hence, option (A) is the correct answer.

Credit Corporation Has Provided the Following Information Concerning a Capital