2D1C FULLER INDUSTRIES IS CONSIDERING A $1 MILLION INVESTMENT IN STAM...

310.

CSO: 2D1c

LOS: 2D1c

Fuller Industries is considering a $1 million investment in stamping equipment to

produce a new product. The equipment is expected to last nine years, produce revenue of

$700,000 per year, and have related cash expenses of $450,000 per year. At the end of

the 9th year, the equipment is expected to have a salvage value of $100,000 and cost

$50,000 to remove. The IRS categorizes this as 5-year Modified Accelerated Cost

Recovery System (MACRS) property subject to the following depreciation rates.

Year

Rate

1

20.00%

2

32.00%

3

19.20%

4

11.52%

5

11.52%

6

5.76%

Fuller’s effective income tax rate is 40% and Fuller expects, on an overall company basis,

to continue to be profitable and have significant taxable income. If Fuller uses the net

present value method to analyze investments, what is the expected net tax impact on cash

flow in Year 2 before discounting?

a.

Tax benefit of $28,000.

b.

$0.

c.

Negative $100,000.

d.

Negative $128,000.