Nakama Corporation Is Considering Investing in a Project That Would

question 282

Multiple Choice

Nakama Corporation is considering investing in a project that would have a 4 year expected useful life. The company would need to invest $124,000 in equipment that will have zero salvage value at the end of the project. Annual incremental sales would be $410,000 and annual cash operating expenses would be $260,000. In year 3 the company would have to incur one-time renovation expenses of $74,000. 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's tax rate is 30%. The company uses straight-line depreciation on all equipment.The income tax expense in year 2:

• A) $35,700
• B) $32,700
• C) $28,300
• D) $13,500

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Definitions:

Expenses

Costs incurred by a business in the process of earning revenue, including operational costs, wages, and utilities, reflected on the income statement.

Straight-Line Depreciation

A system for allocating the expenditure of a material asset across its life expectancy in identical yearly figures.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded against a fixed asset over its useful life to date.

Unearned Revenue

Income received by a company for goods or services that have not yet been delivered or performed.