Stack Corporation Is Considering a Capital Budgeting Project That Would

question 141

Multiple Choice

Stack 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 $200,000 and annual incremental cash operating expenses would be $150,000. The project would also require a one-time renovation cost of $10,000 in year 3. The company's income tax rate is 35% 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 total cash flow net of income taxes in year 3 is:

• A)$29,500
• B)$39,500
• C)$33,000
• D)$40,000

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Definitions:

Adjusting Journal Entry

An entry made in a journal at the end of an accounting period to allocate income and expenditure to the appropriate period.

Balance Sheet Approach

A method of estimating a company's value by focusing on its balance sheet, particularly its assets and liabilities.

Allowance for Doubtful Accounts

A contra-asset account representing the estimated portion of accounts receivable that may not be collected.

Balance Sheet Approach

A method of estimating allowances based on the balances of particular accounts, focusing on the assets and liabilities reported on the balance sheet.