Question

Nakama Corporation is considering investing in a project that would have a 4 year expected useful life. The company would need to invest $168,000 in equipment that will have zero salvage value at the end of the project. Annual incremental sales would be $520,000 and annual cash operating expenses would be $300,000. In year 3 the company would have to incur one-time renovation expenses of $96,000. Working capital in the amount of $10,000 would be required. The working capital would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. The income tax expense in year 2: ___________

Answer 1

Answer:

We have to assume specific tax rate to come up with the income tax expenses. Let assume the tax rate is 30%.

The income tax expense in year 2: $53,400.

Explanation:

We have:

Depreciation expenses of the equipment in the second year = (Initial cost - salvage value) / Useful life = (168,000 - 0)/4 = $42,000.

Profit before tax in year 2 = Sales in year 2 - operating expenses in year 2 - Depreciation expenses in year 2 = 520,000 - 300,000 - 42,000 = $178,000.

Income tax expense in year 2 = Profit before tax in year 2 x tax rate = 178,000 x 30% = $53,400.

So, the answer is $53,400.