Question

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

Tax rate		30	%
Expected life of the project		4
Investment required in equipment	$	66,000
Salvage value of equipment	$	0
Annual sales	$	255,000
Annual cash operating expenses	$	178,500
One-time renovation expense in year 3	$	26,000

The company uses straight-line depreciation on all equipment.

The income tax expense in year 3 is:

Garrison 16e updates 05-17-2018, 06-15-2018

Multiple Choice

• $9,900

• $7,800

• $4,950

• $10,200

Answer 1

Income tax expense in Year-3
Annual Sales	255,000
Less: Annual cash operating expenses	178,500
Less: Depreciation expenses [($66,000 - $0) / 4 Years]	16,500
Less: One-time renovation expense	26,000
Earnings before taxes	34,000
Les: Taxes at 30% [$34,000 x 30%]	10,200
Net Income	23,800
Therefore, the Income tax expense in Year-3 will be $10,200