Exam 11: Capital Budgeting

Robin Company is considering the purchase of a new $80,000 delivery van. The van will have a useful life of 5 years, no terminal salvage value, and tax depreciation will be calculated using the straight- line method. If the van is purchased, the company will be able to increase annual revenues by $90,000 per year for the life of the van, but out- of- pocket expenses will also increase by $60,000 per year. Assume a tax rate of 40% and a required after- tax rate of return equal to 10%. The annual net after- tax cash effect of operations, exclusive of depreciation, is a(n):

"The higher the minimum desired rate of return, the higher the price that a company will be willing to pay for cost- saving equipment." Do you agree? Explain.

When evaluated using a nominal rate of 8%, the net present value of a project is zero. Identify which one of the following statements is true.

A five year MACRS asset which cost $50,000 with zero terminal value was sold at the end of its useful life for $20,000. The tax rate is 40%. is the net after- tax cash inflow resulting from the transaction.

Matt Helm Corporation is considering the purchase of an asset for $400,000. It is expected that the product manufactured by the equipment can be sold for $150,000 and that there will be annual production costs, exclusive of depreciation, equal to $80,000. The asset will have a 10- year life, no terminal salvage value, and straight- line depreciation will be used for tax purposes. The tax rate applicable to Matt Helm Corporation is 30%. If the equipment is purchased, the total net after- tax effect on cash flows over the entire life of the investment is:

A recognized loss on a sale of an asset causes a company's tax liability to decrease.

U.S. corporations are required to use the same method of calculating depreciation on both their income tax return and their annual published financial statements.

An initial investment of $180,000 is expected to generate $75,000 in annual cost savings over the asset's expected 3- year life. Assume straight- line depreciation and ignore income taxes. The accounting rate of return based on initial investment is:

An accountant's main function in capital budgeting is to:

is not another name for the required rate of return.

Ajax Company pays 15% on the first $50,000 of pre- tax income and 30% on any additional pre- tax income. Ajax Company currently earns $52,000. An investment under consideration is expected to add $20,000 in pre- tax income. is the rate on the additional income.

If the appropriate tax rate is 30%, the after- tax effect of a single depreciation deduction of $100,000 is a:

Nominal rate = real rate - inflation.

Accelerated depreciation for tax purposes will generally produce a present value of tax savings that is:

A company pays taxes of 25% on their first $25,000 of pre- tax income, and 35% on any taxable income in excess of $25,000. The marginal tax rate, if current pre- tax income is $30,000, is:

An asset with a book value of $320,000 is sold at a $240,000 pre- tax gain in a year when the tax rate is 40%. is the tax effect of the gain.

Sally Sweet Tooth Company will purchase a van for $50,000. The van's depreciable life is 5 years with no terminal salvage value. Assume a tax rate of 40% and a required after- tax rate of return of 12%. The annual after- tax effect of depreciation, if the straight- line method is used for taxes, is a:

Real rate = risk- free rate + business- risk rate.

Used in capital budgeting, it shows the financial consequences that would occur if actual cash inflows, outflows, and project lives differed from those expected

The marginal income tax rate is the tax rate paid on additional amounts of taxable income.