Asked by Jazmin Blanco Ferrufino on Jun 22, 2024
Verified
Layer 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 8%. The working capital would be required immediately and would be released for use elsewhere at the end of the project. 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) $3,000
B) $9,000
C) $21,000
D) $6,000
After-Tax Discount Rate
A rate used in capital budgeting that takes into account the effects of taxes on the project's cash flows.
Straight-Line Depreciation
A strategy for apportioning the cost of a solid asset over its period of utility in uniform annual portions.
- Compute the tax expense on income related to projects in capital budgeting.
- Examine how working capital adjustments affect the cash flows within a project.
Verified Answer
MG
Michael GallegosJun 29, 2024
Final Answer :
B
Explanation :
To calculate the income tax expense in year 2, first we need to calculate the taxable income in year 2.
The cash inflows in year 2 are $27,000 and the depreciation expense in year 2 is ($75,000/3) = $25,000. Therefore, the taxable income in year 2 is:
Taxable income Year 2 = $27,000 - $25,000 = $2,000
The income tax rate is 30%, so the income tax expense in year 2 is:
Income Tax Expense Year 2 = $2,000 x 30% = $6000
Therefore, the correct answer is B.
The cash inflows in year 2 are $27,000 and the depreciation expense in year 2 is ($75,000/3) = $25,000. Therefore, the taxable income in year 2 is:
Taxable income Year 2 = $27,000 - $25,000 = $2,000
The income tax rate is 30%, so the income tax expense in year 2 is:
Income Tax Expense Year 2 = $2,000 x 30% = $6000
Therefore, the correct answer is B.
Learning Objectives
- Compute the tax expense on income related to projects in capital budgeting.
- Examine how working capital adjustments affect the cash flows within a project.
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