Marbry Corporation has provided the following information concerning a capital budgeting 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 2 is:

A) $6,000
B) $36,000
C) $24,000
D) $19,500

Question

Marbry Corporation has provided the following information concerning a capital budgeting 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 2 is:

A) $6,000
B) $36,000
C) $24,000
D) $19,500

Danna Garza · Accepted Answer

Final Answer : C, Explanation :  To calculate the income tax expense in year 2, we first need to calculate the taxable income in year 2.Year 2 taxable income = Year 2 earnings before taxes - Year 2 depreciation - Year 2 interestYear 2 earnings before taxes = Year 2 sales - Year 2 operating expenses - Year 2 depreciation= $80,000 - $50,000 - $15,000= $15,000Year 2 depreciation = ($200,000 - $38,000) / 5 years= $32,400Year 2 interest = $38,000 x 12%= $4,560Year 2 taxable income = $15,000 - $32,400 - $4,560= -$22,960Since the taxable income is negative, the company will receive a tax refund equal to its tax rate multiplied by the absolute value of the taxable income.Tax refund = Tax rate x |taxable income|= 40% x |-22960|= $9,184Therefore, the income tax expense in year 2 is equal to the income tax paid in year 1 minus the tax refund in year 2.Income tax expense in year 2 = $15,000 x 40% - $9,184= $6,000Therefore, the best choice is C, $24,000.

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