Chapter 13 Appendix C

Chapter 13 Appendix C

Student: ___________________________________________________________________________

1. The reduction in taxes made possible by the annual depreciation deductions equals the depreciation deduction

multiplied by the tax rate.

True False

2. The release of working capital at the end of an investment project is a taxable cash inflow.

True False

3. Not all cash inflows are taxable.

True False

4. When a company invests in equipment, it gets to immediately expense the cost of the equipment on the

company's tax reports.

True False

5. In an equipment selection capital budgeting decision, which of the following will increase the present value

of the tax savings from the annual depreciation deductions?

A. an increase in the cost of capital.

B. an increase in the tax rate.

C. an increase in the salvage value of the equipment.

D. a decrease in the cost of new equipment.

6. Depreciation expense reduces income taxes by an amount equal to:

A. one minus the tax rate times the amount of deprecation.

B. the tax rate times the amount of depreciation.

C. the amount of the depreciation.

D. one minus the amount of depreciation.

7. The after-tax cost of a deductible cash expense is:

A. The amount of the cash expense.

B. The amount of the cash expense times the tax rate.

C. The amount of the cash expense times 1 minus the tax rate.

D. Zero.

8. Last year the sales at Jersey Company were $200,000 and were all cash sales. The expenses at Jersey were

$125,000 and were all cash expenses. The tax rate was 30%. The after-tax net cash inflow at Jersey last year

from these operations was:

A. $37,500

B. $60,000

C. $22,500

D. $52,500

9. A company anticipates a taxable cash receipt of $30,000 in year 2 of a project. The company's tax rate is 30%

and its discount rate is 10%. The present value of this future cash flow is closest to:

A. $17,355

B. $7,438

C. $9,000

D. $21,000

10. Consider a machine which costs $115,000 now and which has a useful life of seven years. This machine will

require a major overhaul at the end of the fourth year which will cost "X" dollars. If the tax rate is 40%, and if

the after-tax cash outflow for this overhaul is $3,600, then the amount of "X" in dollars is:

A. $6,000

B. $9,000

C. $2,160

D. $1,440

11. Ring Corporation uses a discount rate of 12% and has a tax rate of 30%. The following cash flows occur in

the third year of an equipment selection investment project:

The total after-tax present value of the cash flows is closest to:

A. $10,152

B. $34,603

C. $60,235

D. $79,459

12. Superstrut is considering replacing an old press that cost $80,000 six years ago with a new one that would

cost $245,000. The old press has a net book value of $15,000 and could be sold for $5,000. The increased

production of the new press would require an investment in additional working capital of $6,000. The

company's tax rate is 40%. Superstrut's net investment now in the project would be:

A. $256,000

B. $242,000

C. $250,000

D. $245,000

13. A company needs an increase in working capital of $10,000 in a project that will last 4 years. The

company's tax rate is 30% and its discount rate is 8%. The present value of the release of the working capital at

the end of the project is closest to:

A. $7,350

B. $3,000

C. $7,000

D. $5,145

14. The Dill and Gherkin Law Firm is contemplating the decision to open up a branch office across town. The

firm would sign a 5-year lease for a fully furnished office for $24,000 per year. The lease also requires a

$30,000 security deposit upon signing. This deposit will be given back at the end of the 5-year lease term. No

other amounts will need to be invested. However, additional operating costs are expected to be $65,000 per year

for the 5 years. The firm expects to generate an additional $100,000 of revenue per year for the 5 years from the

branch office. The firm's after-tax cost of capital is 16% and its tax rate is 30%. The net present value of this

investment project is closest to:

A. $(509)

B. $5,206

C. $9,490

D. $14,206

15. A company anticipates a taxable cash expense of $80,000 in year 2 of a project. The company's tax rate is

30% and its discount rate is 10%. The present value of this future cash flow is closest to:

A. $(56,000)

B. $(19,835)

C. $(46,281)

D. $(24,000)

16. Last year the sales at Seidelman Company were $700,000 and were all cash sales. The company's expenses

were $450,000 and were all cash expenses. The tax rate was 35%. The after-tax net cash inflow at Seidelman

last year was:

A. $700,000

B. $250,000

C. $162,500

D. $87,500

17. Last year the sales at Summit Company were $400,000 and were all cash sales. The expenses at Summit

were $250,000 and were all cash expenses. The tax rate was 40%. The after-tax net cash inflow at Summit last

year was:

A. $150,000

B. $60,000

C. $90,000

D. $400,000

18. Suppose a machine costs $20,000 now, has an expected life of eight years, and will require a $7,000

overhaul at the end of the third year. If the tax rate is 40%, then the after-tax cost of this overhaul would be:

A. $12,000

B. $4,200

C. $8,000

D. $2,800

19. A company anticipates a depreciation deduction of $20,000 in year 3 of a project. The company's tax rate is

30% and its discount rate is 14%. The present value of the annual depreciation deductions resulting from this

deduction is closest to:

A. $9,450

B. $14,000

C. $6,000

D. $4,050

Burry Inc. has provided the following data to be used in evaluating a proposed investment project:

For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 5

years. The company uses a discount rate of 11%.

20. When computing the net present value of the project, what are the annual after-tax cash receipts?

A. $338,000

B. $168,900

C. $394,100

D. $67,500

21. When computing the net present value of the project, what are the annual after-tax cash expenses?

A. $235,000

B. $217,000

C. $93,000

D. $403,000

22. By how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is

taken?

A. $45,000

B. $75,000

C. $105,000

D. $32,143

23. When computing the net present value of the project, what is the after-tax cash flow from the salvage value

in the final year?

A. $22,500

B. $75,000

C. $52,500

D. $0

24. The net present value of the project is closest to:

A. $250,815

B. $84,495

C. $109,800

D. $276,120

Jenny Inc. has provided the following data concerning an investment project that has been proposed:

The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years

without any reduction for salvage value. The company uses a discount rate of 14%.


in the final year?

A. $0

B. $31,500

C. $45,000

D. $13,500


A. $227,071

B. $58,113

C. $241,435

D. $43,749

Michelotti Inc. is considering an investment project that would require an initial investment of $140,000 and

that would last for 7 years. The annual cash receipts from the project would be $105,000 and the annual cash

expenses would be $47,000. The equipment used in the project could be sold at the end of the project for a

salvage value of $7,000. The company's tax rate is 30%. For tax purposes, the entire initial investment will be

depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 19%.


A. $73,500

B. $77,000

C. $58,000

D. $31,500


A. $11,914

B. $37,601

C. $10,464

D. $34,151

Morgado Inc. has provided the following data to be used in evaluating a proposed investment project:




A. $39,000

B. $13,650

C. $54,600

D. $23,400


A. $12,900

B. $30,100

C. $55,900

D. $30,000


taken?

A. $6,500

B. $15,167

C. $18,200

D. $7,800


in the final year?

A. $9,100

B. $3,900

C. $13,000

D. $0

33. Sarafin Inc. is considering a project that would require an initial investment of $693,000 and would have a

useful life of 7 years. The annual cash receipts would be $416,000 and the annual cash expenses would be

$208,000. The salvage value of the assets used in the project would be $35,000. The company's tax rate is 30%.



Required:

Compute the net present value of the project.

34. Management is considering purchasing an asset for $30,000 that would have a useful life of 5 years and no

salvage value. For tax purposes, the entire original cost of the asset would be depreciated over 5 years using the

straight-line method. The asset would generate annual net cash inflows of $21,000 throughout its useful life.

The project would require additional working capital of $4,000, which would be released at the end of the

project. The company's tax rate is 40% and its discount rate is 8%.

Required:

What is the net present value of the asset?

35. A company is considering purchasing an asset for $50,000 that would have a useful life of 8 years and

would have a salvage value of $5,000. For tax purposes, the entire original cost of the asset would be

depreciated over 8 years using the straight-line method and the salvage value would be ignored. The asset

would generate annual net cash inflows of $26,000 throughout its useful life. The project would require

additional working capital of $8,000, which would be released at the end of the project. The company's tax rate

is 40% and its discount rate is 13%.

Required:


36. Eisenbeis Inc. has provided the following data concerning a proposed investment project:

The company's tax rate is 30%. For tax purposes, the entire initial investment without any reduction for salvage

value will be depreciated over 7 years. The company uses a discount rate of 13%.

Required:


Chapter 13 Appendix C Key

1. The reduction in taxes made possible by the annual depreciation deductions equals the depreciation deduction

multiplied by the tax rate.

TRUE

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Blooms: Comprehension

Garrison - Chapter 13 #1

Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis

Level: Medium

2. The release of working capital at the end of an investment project is a taxable cash inflow.

FALSE







Level: Medium

3. Not all cash inflows are taxable.

TRUE







Level: Medium

4. When a company invests in equipment, it gets to immediately expense the cost of the equipment on the

company's tax reports.

FALSE




Blooms: Knowledge



Level: Easy

5. In an equipment selection capital budgeting decision, which of the following will increase the present value

of the tax savings from the annual depreciation deductions?

A. an increase in the cost of capital.

B. an increase in the tax rate.

C. an increase in the salvage value of the equipment.

D. a decrease in the cost of new equipment.







Level: Medium

6. Depreciation expense reduces income taxes by an amount equal to:

A. one minus the tax rate times the amount of deprecation.

B. the tax rate times the amount of depreciation.

C. the amount of the depreciation.

D. one minus the amount of depreciation.




Blooms: Knowledge



Level: Easy

Source: CMA, adapted

7. The after-tax cost of a deductible cash expense is:

A. The amount of the cash expense.

B. The amount of the cash expense times the tax rate.

C. The amount of the cash expense times 1 minus the tax rate.

D. Zero.







Level: Medium

8. Last year the sales at Jersey Company were $200,000 and were all cash sales. The expenses at Jersey were

$125,000 and were all cash expenses. The tax rate was 30%. The after-tax net cash inflow at Jersey last year

from these operations was:

A. $37,500

B. $60,000

C. $22,500

D. $52,500

AACSB: Analytic



Blooms: Application



Level: Easy

9. A company anticipates a taxable cash receipt of $30,000 in year 2 of a project. The company's tax rate is 30%

and its discount rate is 10%. The present value of this future cash flow is closest to:

A. $17,355

B. $7,438

C. $9,000

D. $21,000

The answer without rounding error is $17,355.

AACSB: Analytic



Blooms: Application



Level: Medium

10. Consider a machine which costs $115,000 now and which has a useful life of seven years. This machine will

require a major overhaul at the end of the fourth year which will cost "X" dollars. If the tax rate is 40%, and if

the after-tax cash outflow for this overhaul is $3,600, then the amount of "X" in dollars is:

A. $6,000

B. $9,000

C. $2,160

D. $1,440

After-tax cost = (1 - Tax rate) Tax-deductible cash expense

$3,600 = (1 - 0.40) Tax-deductible cash expense

Tax deductible cash expense = $3,600 0.60 = $6,000

AACSB: Analytic



Blooms: Application



Level: Hard

11. Ring Corporation uses a discount rate of 12% and has a tax rate of 30%. The following cash flows occur in

the third year of an equipment selection investment project:

The total after-tax present value of the cash flows is closest to:

A. $10,152

B. $34,603

C. $60,235

D. $79,459

AACSB: Analytic



Blooms: Application



Level: Medium

12. Superstrut is considering replacing an old press that cost $80,000 six years ago with a new one that would

cost $245,000. The old press has a net book value of $15,000 and could be sold for $5,000. The increased

production of the new press would require an investment in additional working capital of $6,000. The

company's tax rate is 40%. Superstrut's net investment now in the project would be:

A. $256,000

B. $242,000

C. $250,000

D. $245,000

AACSB: Analytic



Blooms: Application



Level: Medium

Source: CMA, adapted

13. A company needs an increase in working capital of $10,000 in a project that will last 4 years. The

company's tax rate is 30% and its discount rate is 8%. The present value of the release of the working capital at

the end of the project is closest to:

A. $7,350

B. $3,000

C. $7,000

D. $5,145

AACSB: Analytic



Blooms: Application



Level: Medium

14. The Dill and Gherkin Law Firm is contemplating the decision to open up a branch office across town. The

firm would sign a 5-year lease for a fully furnished office for $24,000 per year. The lease also requires a

$30,000 security deposit upon signing. This deposit will be given back at the end of the 5-year lease term. No

other amounts will need to be invested. However, additional operating costs are expected to be $65,000 per year

for the 5 years. The firm expects to generate an additional $100,000 of revenue per year for the 5 years from the

branch office. The firm's after-tax cost of capital is 16% and its tax rate is 30%. The net present value of this

investment project is closest to:

A. $(509)

B. $5,206

C. $9,490

D. $14,206

AACSB: Analytic



Blooms: Application



Level: Medium

15. A company anticipates a taxable cash expense of $80,000 in year 2 of a project. The company's tax rate is

30% and its discount rate is 10%. The present value of this future cash flow is closest to:

A. $(56,000)

B. $(19,835)

C. $(46,281)

D. $(24,000)

The exact answer without rounding is $(46,281).

AACSB: Analytic



Blooms: Application



Level: Medium

16. Last year the sales at Seidelman Company were $700,000 and were all cash sales. The company's expenses

were $450,000 and were all cash expenses. The tax rate was 35%. The after-tax net cash inflow at Seidelman

last year was:

A. $700,000

B. $250,000

C. $162,500

D. $87,500

AACSB: Analytic



Blooms: Application



Level: Easy

17. Last year the sales at Summit Company were $400,000 and were all cash sales. The expenses at Summit

were $250,000 and were all cash expenses. The tax rate was 40%. The after-tax net cash inflow at Summit last

year was:

A. $150,000

B. $60,000

C. $90,000

D. $400,000

AACSB: Analytic



Blooms: Application



Level: Easy

18. Suppose a machine costs $20,000 now, has an expected life of eight years, and will require a $7,000

overhaul at the end of the third year. If the tax rate is 40%, then the after-tax cost of this overhaul would be:

A. $12,000

B. $4,200

C. $8,000

D. $2,800

AACSB: Analytic



Blooms: Application



Level: Easy

19. A company anticipates a depreciation deduction of $20,000 in year 3 of a project. The company's tax rate is

30% and its discount rate is 14%. The present value of the annual depreciation deductions resulting from this

deduction is closest to:

A. $9,450

B. $14,000

C. $6,000

D. $4,050

AACSB: Analytic



Blooms: Application



Level: Medium

Burry Inc. has provided the following data to be used in evaluating a proposed investment project:



Garrison - Chapter 13


A. $338,000

B. $168,900

C. $394,100

D. $67,500

AACSB: Analytic



Blooms: Application



Level: Medium


A. $235,000

B. $217,000

C. $93,000

D. $403,000

AACSB: Analytic



Blooms: Application



Level: Medium


taken?

A. $45,000

B. $75,000

C. $105,000

D. $32,143

Tax savings from the depreciation tax shield = Tax rate Depreciation deduction

= 0.30 $150,000 = $45,000

AACSB: Analytic



Blooms: Application



Level: Medium


in the final year?

A. $22,500

B. $75,000

C. $52,500

D. $0

AACSB: Analytic



Blooms: Application



Level: Medium


A. $250,815

B. $84,495

C. $109,800

D. $276,120

AACSB: Analytic



Blooms: Application



Level: Medium

Jenny Inc. has provided the following data concerning an investment project that has been proposed:





in the final year?

A. $0

B. $31,500

C. $45,000

D. $13,500

AACSB: Analytic



Blooms: Application



Level: Medium


A. $227,071

B. $58,113

C. $241,435

D. $43,749

AACSB: Analytic



Blooms: Application



Level: Medium

Michelotti Inc. is considering an investment project that would require an initial investment of $140,000 and

that would last for 7 years. The annual cash receipts from the project would be $105,000 and the annual cash

expenses would be $47,000. The equipment used in the project could be sold at the end of the project for a

salvage value of $7,000. The company's tax rate is 30%. For tax purposes, the entire initial investment will be

depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 19%.



A. $73,500

B. $77,000

C. $58,000

D. $31,500

AACSB: Analytic



Blooms: Application



Level: Medium


A. $11,914

B. $37,601

C. $10,464

D. $34,151

AACSB: Analytic



Blooms: Application



Level: Medium

Morgado Inc. has provided the following data to be used in evaluating a proposed investment project:





A. $39,000

B. $13,650

C. $54,600

D. $23,400

AACSB: Analytic



Blooms: Application



Level: Medium


A. $12,900

B. $30,100

C. $55,900

D. $30,000

AACSB: Analytic



Blooms: Application



Level: Medium


taken?

A. $6,500

B. $15,167

C. $18,200

D. $7,800

AACSB: Analytic



Blooms: Application



Level: Medium


in the final year?

A. $9,100

B. $3,900

C. $13,000

D. $0

AACSB: Analytic



Blooms: Application



Level: Medium

33. Sarafin Inc. is considering a project that would require an initial investment of $693,000 and would have a

useful life of 7 years. The annual cash receipts would be $416,000 and the annual cash expenses would be

$208,000. The salvage value of the assets used in the project would be $35,000. The company's tax rate is 30%.



Required:


AACSB: Analytic



Blooms: Application



Level: Medium

34. Management is considering purchasing an asset for $30,000 that would have a useful life of 5 years and no

salvage value. For tax purposes, the entire original cost of the asset would be depreciated over 5 years using the

straight-line method. The asset would generate annual net cash inflows of $21,000 throughout its useful life.

The project would require additional working capital of $4,000, which would be released at the end of the

project. The company's tax rate is 40% and its discount rate is 8%.

Required:


AACSB: Analytic



Blooms: Application



Level: Medium

35. A company is considering purchasing an asset for $50,000 that would have a useful life of 8 years and

would have a salvage value of $5,000. For tax purposes, the entire original cost of the asset would be

depreciated over 8 years using the straight-line method and the salvage value would be ignored. The asset

would generate annual net cash inflows of $26,000 throughout its useful life. The project would require

additional working capital of $8,000, which would be released at the end of the project. The company's tax rate

is 40% and its discount rate is 13%.

Required:


AACSB: Analytic



Blooms: Application



Level: Medium

36. Eisenbeis Inc. has provided the following data concerning a proposed investment project:

The company's tax rate is 30%. For tax purposes, the entire initial investment without any reduction for salvage

value will be depreciated over 7 years. The company uses a discount rate of 13%.

Required:


AACSB: Analytic



Blooms: Application



Level: Medium

Chapter 13 Appendix C Summary

Category # of Questions

AACSB: Analytic 29

AACSB: Reflective Thinking 7

AICPA BB: Critical Thinking 36

AICPA FN: Measurement 36

Blooms: Application 29

Blooms: Comprehension 5

Blooms: Knowledge 2

Garrison - Chapter 13 40

Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis 36

Level: Easy 6

Level: Hard 1

Level: Medium 29

Source: CMA, adapted 2

Chapter 13 Appendix C

Documents

Transcript of Chapter 13 Appendix C