Stars Corporation has provided the following information concerning a capital budgeting project
Question # 00286591
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Updated on: 05/16/2016 04:33 PM Due on: 06/15/2016
(Appendix 8C) Stars Corporation has provided the following information concerning a capital budgeting project:
| After-tax discount rate | 14% |
| Tax rate | 30% |
| Expected life of the project | 4 |
| Investment required in equipment | $80,000 |
| Salvage value of equipment | $0 |
| Working capital requirement | $10,000 |
| Annual sales | $220,000 |
| Annual cash operating expenses | $170,000 |
| One-time renovation expense in year 3 | $20,000 |
The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. 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:
| $9,000 | |
| $3,000 | |
| $15,000 | |
| $6,000 |
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Rating:
/5
Solution: Stars Corporation has provided the following information concerning a capital budgeting project