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

question 28

Multiple Choice

(Appendix 8C) Folino Corporation is considering a capital budgeting project that would require investing $120, 000 in equipment with an expected life of 4 years and zero salvage value.Annual incremental sales would be $380, 000 and annual incremental cash operating expenses would be $300, 000.The project would also require an immediate investment in working capital of $10, 000 which would be released for use elsewhere at the end of the project.The project would also require a one-time renovation cost of $30, 000 in year 3.The company's income tax rate is 35% and its after-tax discount rate is 15%.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)$28, 000
• B)$10, 500
• C)$7, 000
• D)$17, 500

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Definitions:

NAFTA

The North American Free Trade Agreement, a treaty entered into by the United States, Canada, and Mexico, aimed at eliminating trade barriers and promoting economic integration among these countries.

WTO

The World Trade Organization, an international body that regulates trade agreements and assists in resolving trade disputes among countries.

Offshore Purchases

Buying goods or services from suppliers located in another country, typically for cost savings.

Lead Time

The duration between the initiation and the completion of a production process or the delivery of a service.