Question

Nakama Corporation is considering investing in a project that would have a 4 year expected useful life. The company would need to invest $160,000 in equipment that will have zero salvage value at the end of the project. Annual incremental sales would be $500,000 and annual cash operating expenses would be $275,000. In year 3 the company would have to incur one-time renovation expenses of $92,000. 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 company's tax rate is 30%.

The income tax expense in year 2:

Answer 1

Answer
	Year 2
Annual incremental sales revenue	$       5,00,000
(-) Annual cash operating expenses	$      -2,75,000
(-) Depreciation	$         -40,000
Income before taxes	$       1,85,000
Income tax expense @ 30%	$          55,500
Working Note for depreciation
Depreciation per year using straight-line method =	$          40,000
( Cost - Estimated salvage value ) / Estimated useful life
( 160000 - 0 ) / 4
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