Exam 11: Capital Budgeting

The 20X0 income statement of Nemo Company included the following: Sales \ 90,000 Less: Expenses, excluding depreciation \ 40,000 Depreciation 30,000 Income before taxes \ 20,000 Less: Income taxes (30\%) \ 6,000 Net income \ 14,000 Required: Calculate the total after- tax effect on cash.

The cost of capital is sometimes referred to as:

A good rule of thumb in tax planning is to recognize taxable income sooner rather than later.

Under United States tax laws, a company may estimate the useful life of an asset for depreciation purposes.

A discounted- cash- flow approach to capital budgeting that discounts all expected future cash flows to the present using a minimum desired rate of return

A reduction in a cash outflow:

are decisions on whether to acquire an asset, a project, a company, or a product line.

is (are) not a relevant cash inflow or cash outflow.

If the appropriate tax rate is 30%, the after- tax effect of an $100,000 savings in labor cost is:

is not considered an outflow at time zero.

does not require an explicit adjustment for inflation.

A company will experience the same total tax savings over the life of an asset, regardless of the method of depreciation used.

"Nonprofit organizations do not use DCF because their cost of capital is zero." Do you agree? Explain.

"We cannot use sensitivity analysis because our cash- flow predictions are too inaccurate." Comment.

is the decline in the general purchasing power of the monetary unit.

shows the financial consequences that would occur if actual cash flows differ from expected cash flows.

When comparing projects using the total project approach, a manager should:

Identify which one of the following statements regarding the risk of an investment is true.

One purpose of a post- audit is to provide information for improving future predictions of cash flows.

When using the NPV model, a world of uncertainty is assumed.