Question

1.Coache Corporation is considering a capital budgeting project that would require an investment of $350,000 in equipment with a 4 year useful life and zero salvage value. The annual incremental sales would be $690,000 and the annual incremental cash operating expenses would be $470,000. In addition, there would be a one-time renovation expense in year 3 of $42,000. The company’s income tax rate is 30%. The company uses straight-line depreciation on all equipment.

The total cash flow net of income taxes in year 3 is:

2.

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 $ 78,000

Salvage value of equipment $ 0

Annual sales $ 265,000

Annual cash operating expenses $ 172,250

One-time renovation expense in year 3 $ 27,000

The company uses straight-line depreciation on all equipment.

The income tax expense in year 3 is:

Answer 1

1)

	Year 3
Sales	690000
less: cash operating expense	-470000
Depreciation expense (350000/4)	-87500
Renovation expense	-42000
Income before tax	90500
less:Tax expense (90500*30%)	- 27150
Net income	63350
Add:Depreciation	87500
Total cash flow for year 3	150850

2)Tax expense = 13875

Sales	265000
less: cash operating expense	-172250
Depreciation expense (78000/4)	-19500
Renovation expense	-27000
Income before tax	46250
less:Tax expense (46250*30%)	13875