(Appendix 8C)Trammel Corporation Is Considering a Capital Budgeting Project That

question 89

Multiple Choice

(Appendix 8C) Trammel Corporation is considering a capital budgeting project that would require investing $280, 000 in equipment with an expected life of 4 years and zero salvage value.Annual incremental sales would be $650, 000 and annual incremental cash operating expenses would be $450, 000.The project would also require a one-time renovation cost of $100, 000 in year 3.The company's income tax rate is 30% and its after-tax discount rate is 7%.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 3 is:

• A)$9, 000
• B)$30, 000
• C)$39, 000
• D)$60, 000

---

Definitions:

Direct Labor Standard

A benchmark for the amount of labor time that should be consumed in the production of a good or service, used for costing and efficiency analysis.

Labor Rate Variance

The financial difference between the actual cost of labor and the budgeted (or standard) cost of labor, influenced by the wage rates paid and the amount of labor hours used.

Labor Standards

Benchmarks or norms established for the amount of labor required to perform a task efficiently, often used to set production targets and labor budgets.

Particular Product

A specific item or good offered for sale by a business.