# Gutshall Corporation is considering a capital budgeting project that would involve investing...

## Question:

Gutshall Corporation is considering a capital budgeting project that would involve investing $160,000 in equipment with an estimated useful life of 4 years and no salvage value at the end of the useful life. Annual incremental sales from the project would be $640,000 and the annual incremental cash operating expenses would be $500,000. A one-time renovation expense of $40,000 would be required in year 3. The project would require investing $12,000 of working capital in the project immediately, but this amount would be recovered at the end of the project in 4 years. The company's income tax rate is 30% and its after-tax discount rate is 14%. The company uses straight-line depreciation on all equipment. The income tax expense in year 3 is:

A. $18,000

B. $42,000

C. $26,400

D. $30,000

## Depreciation:

The book value of the fixed assets is systematically reduced on the balance sheet. The purpose of charging depreciation expense is to allocate the cost of the asset over many years.

## Answer and Explanation: 1

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View this answer**The income tax expense in year 3 is $18,000 (A)**

The income tax expense in year 3 is calculated below.

{eq}Depreciation \ = \...

See full answer below.

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Chapter 5 / Lesson 14Learn about different methods of depreciation and depreciation expense, including: straight-line and declining methods, as well as the difference between physical depreciation and economic depreciation.

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