(Appendix 13C) Bourland Corporation Is Considering a Capital Budgeting Project

question 50

Multiple Choice

(Appendix 13C) Bourland Corporation is considering a capital budgeting project that would require investing $80,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $250,000 and annual incremental cash operating expenses would be $180,000. The project would also require a one-time renovation cost of $40,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 8%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.
-The income tax expense in year 2 is:

• A) $9,000
• B) $15,000
• C) $6,000
• D) $3,000

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Definitions:

GDP

Gross domestic product, a monetary measure of the market value of all final goods and services produced in a country during a specific period.

Federal Expenditures

The spending by the federal government of a country, typically on public services, defense, welfare programs, and infrastructure.

Transfer Payments

Payments made by the government to individuals without any expectation of a direct return service or goods, such as social security benefits.