A small corporation is expecting an annual taxable income of $45,000 for itstax year. It is considering an additional capital investment of $100,000 in anengineering project, which is expected to create an added annual net cash flow (revenues minus expenses) of $35,000 and an added annual depreciation deduction of $20,000. What is the corporation’s federal income tax liability(a) without the added capital investment, (b) with the added capital investment?

A small corporation is expecting an annual taxable income of $45,000 for itstax year. It is considering an additional capital investment of $100,000 in anengineering project, which is expected to create an added annual net cash flow (revenues minus expenses) of $35,000 and an added annual depreciation deduction of $20,000. What is the corporation’s federal income tax liability(a) without the added capital investment, (b) with the added capital investment?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter2: Financial Statements, Cash Flow,and Taxes

Section: Chapter Questions

Problem 10MC

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A small corporation is expecting an annual taxable income of $45,000 for its tax year. It is considering an additional capital investment of $100,000 in an engineering project, which is expected to create an added annual net cash flow (revenues minus expenses) of $35,000 and an added annual depreciation deduction of $20,000. What is the corporation’s federal income tax liability ▫without the added capital investment, ▫with the added capital investment?
a calendar-year C Corporation, is considering investing in a business expenditure with a cost of $10,000. If $8,000 of the cost of the expenditure can be used as a tax credit rather than a tax deduction of $10,000 and the marginal tax rate is 21%, how much additional tax savings would the expenditure generate as a result of the tax credit relative to the tax deduction? a. $2,000 b. $8,000 c. $5,900 d. $2,100
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Firm Z, a corporation with a 21 percent tax rate, has $100,000 to invest in year 0 and two investment choices. Investment 1 will generate $12,000 taxable cash flow annually for years 1 through 5. In year 5, the firm can sell the investment for $100,000. Investment 2 will not generate any taxable income or cash flow in years 1 through 5, but in year 5, the firm can sell Investment 2 for $165,000. Assuming a 6 percent discount rate, which investment has the greater NPV? Would your answer change if Firm Z were a noncorporate taxpayer with a 35 percent tax rate and the gain on sale of Investment 2 were eligible for the 15 percent capital gains rate?