Nakama Corporation Is Considering Investing in a Project That Would

question 59

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 $280,000 in equipment that will have zero salvage value at the end of the project.Annual incremental sales would be $640,000 and annual cash operating expenses would be $480,000.In year 3 the company would have to incur one-time renovation expenses of $50,000.Working capital in the amount of $20,000 would be required.The working capital would be released for use elsewhere at the end of the project.The company's tax rate is 35%.The company uses straight-line depreciation on all equipment. The income tax expense in year 2:

• A) $56,000
• B) $14,000
• C) $17,500
• D) $31,500

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Definitions:

Predetermined Overhead Rates

Calculated by dividing the estimated manufacturing overhead costs by an allocation base at the beginning of the period.

Periodic Inventory Systems

An inventory system in which the inventory count is updated and the cost of goods sold is calculated periodically at specific intervals, often manually.

Direct Labor Costs

Direct labor costs are the wages paid to employees who are directly involved in the production of goods or services.

Factory Wages Payable

Liabilities owed by a company for labor costs associated with the manufacturing process that have not yet been paid.