Question 1

Which of the following is the proper calculation of a company's depreciation tax shield?

Accepted Answer

A) Depreciation / tax rate 
B) Depreciation / (1 - tax rate) 
C) Depreciation / tax rate. 
D) Depreciation * (1 - tax rate). 
E) Depreciation deduction + income taxes. 
A) Depreciation / tax rate 
B) Depreciation / (1 - tax rate) 
C) Depreciation / tax rate. 
D) Depreciation * (1 - tax rate). 
E) Depreciation deduction + income taxes.

Question 2

Which of the following would not involve a capital-budgeting analysis?

Accepted Answer

A) The acquisition of new equipment. 
B) The addition of a new product line. 
C) The adoption of a new cost driver for overhead application. 
D) The construction of a new distribution facility. 
E) The decision of a pro football team to trade for and sign a star quarterback to a long-term contract. 
A) The acquisition of new equipment. 
B) The addition of a new product line. 
C) The adoption of a new cost driver for overhead application. 
D) The construction of a new distribution facility. 
E) The decision of a pro football team to trade for and sign a star quarterback to a long-term contract.

Question 3

When income taxes are considered in capital budgeting,the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and subtracting the result of multiplying [advertising expense * (1 - tax rate)].

Accepted Answer

A) True 
 B)False

Question 4

Consider the following statements about depreciation tax shields:
I.A depreciation tax shield provides distinct benefits to a business.
II.A depreciation tax shield should be ignored when doing a net-present-value analysis.
III.A depreciation tax shield can occur in more than one year.
Which of the above statements is (are)correct?

Accepted Answer

A) I only. 
B) II only. 
C) III only. 
D) I and II. 
E) I and III. 
A) I only. 
B) II only. 
C) III only. 
D) I and II. 
E) I and III.

Question 5

If a proposal's profitability index is greater than one then the net present value is positive.

Accepted Answer

A) True 
 B)False

Question 6

When income taxes are considered in capital budgeting,the cash flows related to a company's depreciation expense would be correctly figured by taking the cash paid for depreciation and:

Accepted Answer

A) adding the result of multiplying (depreciation expense * tax rate). 
B) adding the result of multiplying [depreciation expense * (1 - tax rate)]. 
C) subtracting the result of multiplying (depreciation expense * tax rate). 
D) subtracting the result of multiplying [depreciation expense * (1 - tax rate)]. 
E) doing none of these because there is no cash paid for depreciation. 
A) adding the result of multiplying (depreciation expense * tax rate). 
B) adding the result of multiplying [depreciation expense * (1 - tax rate)]. 
C) subtracting the result of multiplying (depreciation expense * tax rate). 
D) subtracting the result of multiplying [depreciation expense * (1 - tax rate)]. 
E) doing none of these because there is no cash paid for depreciation.

Question 7

Custom Plastics plans to purchase $4.5 million of equipment in the not-too-distant future.The equipment will be depreciated by the optional straight-line method over the MACRS life of 5 years.Custom is subject to a 30% income tax rate.
The company's accountant is about to perform a net-present-value analysis,assuming a 10% after-tax hurdle rate.
Required:
A.Determine the discounted cash flows that would be reflected in the analysis in year 0 and year 1.
A.Year 0 acquisition cost: $(4,500,000)* 1.0 = $(4,500,000)
For taxes,you must ignore salvage value and use the half-year convention.
Year 1 depreciation tax shield: ($4,500,000 / 5)x 0.5 = $450,000 x 0.3 = $135,000 x .909 = $122,715.
B.
   
B.Determine the discounted cash flow that would be reflected in the analysis in year 6,assuming that Custom sells the equipment for $450,000,

Accepted Answer

A.Year 0 acquisition cost:$(4,500,000)*

Question 8

If a proposal's profitability index is greater than one:

Accepted Answer

A) the net present value is negative. 
B) the net present value is positive. 
C) the net present value is zero. 
D) none of these,because the net present value cannot be gauged by the profitability index. 
E) the proposal should be rejected. 
A) the net present value is negative. 
B) the net present value is positive. 
C) the net present value is zero. 
D) none of these,because the net present value cannot be gauged by the profitability index. 
E) the proposal should be rejected.

Question 9

A machine costs $25,000;it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years.The required rate of return is 12%.The net present value of the machine is:

Accepted Answer

A) $(3,840). 
B) $(3,370). 
C) $0. 
D) $21,630. 
E) $28,840. 
A) $(3,840). 
B) $(3,370). 
C) $0. 
D) $21,630. 
E) $28,840.

Question 10

Depreciation is often described as a "tax shield."
Required:
A.Depreciation does not require a cash outlay.(The cash outlay occurred when the asset was acquired. )However,depreciation reduces taxable income and consequently,reduces the cash outflow for income taxes.Thus,depreciation provides a reduction in cash outflows for income taxes,or in other words,shields some of a firm's income.
A.Explain how depreciation provides such a shield.
B.MACRS is an accelerated depreciation system.Explain how an accelerated system can provide a more beneficial tax shield than,say,a straight-line depreciation system.
B.Under an accelerated depreciation system,the asset's cost is written off more rapidly than under the straight-line system.This leaves funds for re-investment sooner,thus allowing a company to generate greater returns because the money is invested for a longer period of time.

Accepted Answer

A.Depreciation does not require a cash o

Question 11

Hazeldine Company plans to incur $230,000 of additional cash operating expenses and produce $410,000 of additional sales revenue if a capital project is implemented.Assuming a 30% tax rate,these two items collectively should appear in a capital budgeting analysis as:

Accepted Answer

A) a $57,000 inflow. 
B) a $57,000 outflow. 
C) a $126,000 outflow. 
D) a $126,000 inflow. 
E) a $161,000 outflow. 
A) a $57,000 inflow. 
B) a $57,000 outflow. 
C) a $126,000 outflow. 
D) a $126,000 inflow. 
E) a $161,000 outflow.

Question 12

In 10 years,Helo Company plans to receive $9,000 cash from the sale of a machine that has a $5,000 book value.If the firm is subject to a 30% income tax rate and has an 8% after-tax hurdle rate,the correct discounted net cash flow would be:

Accepted Answer

A) $2,916.90. 
B) $3,611.40. 
C) $4,167.00. 
D) $4,722.60. 
E) some other amount. 
A) $2,916.90. 
B) $3,611.40. 
C) $4,167.00. 
D) $4,722.60. 
E) some other amount.

Question 13

When a company is analyzing a capital project by a discounted-cash-flow approach and income taxes are being considered,depreciation:

Accepted Answer

A) should be ignored. 
B) should be considered because it results in a tax savings. 
C) should be considered because it is a fixed cost. 
D) should be considered because it is a cash inflow. 
E) should be considered because,like other expenses,it is a cash outlay related to operations. 
A) should be ignored. 
B) should be considered because it results in a tax savings. 
C) should be considered because it is a fixed cost. 
D) should be considered because it is a cash inflow. 
E) should be considered because,like other expenses,it is a cash outlay related to operations.

Question 14

A company used the net-present-value method to analyze an investment and found the investment to be very attractive.If the firm used straight-line depreciation and changes to the Modified Accelerated Cost Recovery System (MACRS),the investment's net present value will:

Accepted Answer

A) increase. 
B) remain the same. 
C) decrease. 
D) change,but the direction cannot be determined based on the data presenteD. 
E) fluctuate in an erratic manner. 
A) increase. 
B) remain the same. 
C) decrease. 
D) change,but the direction cannot be determined based on the data presenteD. 
E) fluctuate in an erratic manner.

Which of the following is the proper calculation of a company's depreciation tax shield?

Which of the following would not involve a capital-budgeting analysis?

When income taxes are considered in capital budgeting,the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and subtracting the result of multiplying [advertising expense * (1 _- tax rate)].

If a proposal's profitability index is greater than one then the net present value is positive.

When income taxes are considered in capital budgeting,the cash flows related to a company's depreciation expense would be correctly figured by taking the cash paid for depreciation and:

If a proposal's profitability index is greater than one:

A machine costs $25,000;it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years.The required rate of return is 12%.The net present value of the machine is:

Hazeldine Company plans to incur $230,000 of additional cash operating expenses and produce $410,000 of additional sales revenue if a capital project is implemented.Assuming a 30% tax rate,these two items collectively should appear in a capital budgeting analysis as:

In 10 years,Helo Company plans to receive $9,000 cash from the sale of a machine that has a $5,000 book value.If the firm is subject to a 30% income tax rate and has an 8% after-tax hurdle rate,the correct discounted net cash flow would be:

When a company is analyzing a capital project by a discounted-cash-flow approach and income taxes are being considered,depreciation:

A company used the net-present-value method to analyze an investment and found the investment to be very attractive.If the firm used straight-line depreciation and changes to the Modified Accelerated Cost Recovery System (MACRS),the investment's net present value will:

The Changing Role of Managerial Accounting in a Dynamic Business Environment

Basic Cost Management Concepts and Accounting for Mass Customization Operations

Product Costing and Cost Accumulation in a Batch Production Environment

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis,cost Behavior,and Cost Estimation

Appendix I: The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

Cost-Volume-Profit Analysis

Absorption and Variable Costing

Profit Planning and Activity-Based Budgeting

Standard Costing,Operational Performance Measures,and the Balanced Scorecard

Flexible Budgeting and the Management of Overhead and Support Activity Costs

Responsibility Accounting, Quality Control, and Environmental Cost Management

Investment Centers and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Allocation of Support Activity Costs and Joint Costs

compound Interest and the Concept of Present Value

Inventory Management

Filters

Exam 16: Capital Expenditure Decisions

Which of the following is the proper calculation of a company's depreciation tax shield?

Which of the following would not involve a capital-budgeting analysis?

When income taxes are considered in capital budgeting,the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and subtracting the result of multiplying [advertising expense * (1 - tax rate)].

If a proposal's profitability index is greater than one then the net present value is positive.

When income taxes are considered in capital budgeting,the cash flows related to a company's depreciation expense would be correctly figured by taking the cash paid for depreciation and:

If a proposal's profitability index is greater than one:

A machine costs $25,000;it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years.The required rate of return is 12%.The net present value of the machine is:

Hazeldine Company plans to incur $230,000 of additional cash operating expenses and produce $410,000 of additional sales revenue if a capital project is implemented.Assuming a 30% tax rate,these two items collectively should appear in a capital budgeting analysis as:

In 10 years,Helo Company plans to receive $9,000 cash from the sale of a machine that has a $5,000 book value.If the firm is subject to a 30% income tax rate and has an 8% after-tax hurdle rate,the correct discounted net cash flow would be:

When a company is analyzing a capital project by a discounted-cash-flow approach and income taxes are being considered,depreciation:

A company used the net-present-value method to analyze an investment and found the investment to be very attractive.If the firm used straight-line depreciation and changes to the Modified Accelerated Cost Recovery System (MACRS),the investment's net present value will:

The Changing Role of Managerial Accounting in a Dynamic Business Environment

Basic Cost Management Concepts and Accounting for Mass Customization Operations

Product Costing and Cost Accumulation in a Batch Production Environment

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis,cost Behavior,and Cost Estimation

Appendix I: The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

Cost-Volume-Profit Analysis

Absorption and Variable Costing

Profit Planning and Activity-Based Budgeting

Standard Costing,Operational Performance Measures,and the Balanced Scorecard

Flexible Budgeting and the Management of Overhead and Support Activity Costs

Responsibility Accounting, Quality Control, and Environmental Cost Management

Investment Centers and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Allocation of Support Activity Costs and Joint Costs

compound Interest and the Concept of Present Value

Inventory Management

Filters

When income taxes are considered in capital budgeting,the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and subtracting the result of multiplying [advertising expense * (1 _- tax rate)].