Question

Correll Corporation is considering a capital budgeting project that would require investing $264,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $630,000 and annual incremental cash operating expenses would be $456,000. The project would also require a one-time renovation cost of $52,000 in year 3. The company’s income tax rate is 30% and its after-tax discount rate is 15%. 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:

Answer 1

Answer:

Income Tax Expense in Year 2 = 32400 USD

Explanation:

The income tax expense can be calculated from the following given data:

First of all we need to find the incremental revenue:

Incremental Revenue = Incremental Sales - Incremental expenses

Incremental Sales = 630,000 USD

Incremental expenses = 456,000 USD

So, plug in the values:

Incremental Revenue = 630,000 USD - 456,000 USD

Incremental Revenue = 174000 USD

Now, we need to find the less annual depreciation:

Less Annual Depreciation = Investment/ Expected Life

Investment = 264,000 USD

Expected Life = 4 years

Less Annual Depreciation = 264,000/4

Less Annual Depreciation = 66000 USD

Now, the next step is to calculate the operating incremental income:

Operating incremental income = Incremental Revenue - Less Annual Depreciation

Incremental revenue = 174000 USD

Less Annual Depreciation = 66000 USD

Operating incremental income = 174000 USD - 66000 USD

Operating incremental income = 108000 USD

30% tax at the operating incremental income is the income tax expense in year 2.

Income Tax Expense in Year 2 = 108000 x 30%

Income Tax Expense in Year 2 = 32400 USD