Question 1

At what amount should the capital cost allowance (CCA)tax shield be included in the calculation of the net present value of an investment project?

Accepted Answer

A)  The amount of the CCA with no adjustment for taxes. 
B)  The amount of the CCA multiplied by one minus the tax rate. 
C)  The amount of the CCA multiplied by the tax rate. 
D)  Zero,since the amount of CCA is not relevant to the calculation of net present value. 
A)  The amount of the CCA with no adjustment for taxes. 
B)  The amount of the CCA multiplied by one minus the tax rate. 
C)  The amount of the CCA multiplied by the tax rate. 
D)  Zero,since the amount of CCA is not relevant to the calculation of net present value.

Question 2

What is the capital budgeting method that divides a project's annual incremental net income by the initial investment?

Accepted Answer

A)  The internal rate of return method. 
B)  The simple (or accounting)rate of return method. 
C)  The payback method. 
D)  The net present value method. 
A)  The internal rate of return method. 
B)  The simple (or accounting)rate of return method. 
C)  The payback method. 
D)  The net present value method.

Question 3

Boston Company is contemplating the purchase of a new machine on which the following information has been gathered: $\begin{array} { l l } 
\text { Cost of the Machine } & \$ 38,900 \
\text { Annual Cash Inflows Expected } & \$ 10,000 \
\text { Salvage Value } & \$ 5,000 \
\text { Life of the Machine } & 6 \text { years }
\end{array}$ The company's discount rate is 16%,and the machine will be depreciated using the straight-line method.Given these data,what is the net present value of the machine? (Ignore income taxes in this problem.)

Accepted Answer

A)  ($26,100). 
B)  ($23,900). 
C)  $0. 
D)  $26,100. 
A)  ($26,100). 
B)  ($23,900). 
C)  $0. 
D)  $26,100.

Question 4

Layton Company is replacing an old delivery van with a new van. The following data relate to this investment decision:
 
The old van is in Class 10 with a maximum CCA rate of 30% and will last for six more years. The new van is also in Class 10 with a maximum CCA rate of 30%. The income tax rate is 40%, and the company's after-tax cost of capital is 10%.
-What is the approximate annual after-tax savings in cash operating costs?

Accepted Answer

A)  $400. 
B)  $800. 
C)  $1,200. 
D)  $2,000. 
A)  $400. 
B)  $800. 
C)  $1,200. 
D)  $2,000.

Question 5

Which of the following is a weakness of the internal rate of return method for screening investment projects?

Accepted Answer

A)  It does NOT consider the time value of money. 
B)  It implicitly assumes that the company is able to reinvest cash flows from the project at the company's discount rate. 
C)  It implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return. 
D)  It does NOT take into account all of the cash flows from a project. 
A)  It does NOT consider the time value of money. 
B)  It implicitly assumes that the company is able to reinvest cash flows from the project at the company's discount rate. 
C)  It implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return. 
D)  It does NOT take into account all of the cash flows from a project.

Question 6

A company anticipates a tax-deductible cash expense of $10,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 8%.What is the approximate present value of this future cash outflow?

Accepted Answer

A)  $7,000. 
B)  $5,999. 
C)  $3,000. 
D)  $2,572. 
A)  $7,000. 
B)  $5,999. 
C)  $3,000. 
D)  $2,572.

Question 7

The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now, and the useful life of the project is ten years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the ten-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in ten years. Finney's discount rate is 16%. (Ignore income taxes in this problem.)
-What would be the immediate cash outflow required for this project?

Accepted Answer

A)  ($150,000). 
B)  ($130,000). 
C)  ($120,000). 
D)  ($90,000). 
A)  ($150,000). 
B)  ($130,000). 
C)  ($120,000). 
D)  ($90,000).

Question 8

The capital cost allowance (CCA)tax shield of a Class 7 asset with a maximum 15% CCA rate was $12,000 for Year 2.The income tax rate was 40%.What was the total CCA deduction for the asset for Year 2?

Accepted Answer

A)  $12,000. 
B)  $20,000. 
C)  $30,000. 
D)  $80,000. 
A)  $12,000. 
B)  $20,000. 
C)  $30,000. 
D)  $80,000.

Question 9

Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives:

Westland College uses a 10% discount rate and the total - cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. (Ignore income taxes in this problem.)
-What is the net present value of the alternative of overhauling the present system?

Accepted Answer

A)  ($1,279,316). 
B)  ($1,194,036). 
C)  ($1,119,316). 
D)  $801,284. 
A)  ($1,279,316). 
B)  ($1,194,036). 
C)  ($1,119,316). 
D)  $801,284.

Question 10

Oriental Company has gathered the following data on a proposed investment project:

The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.)
-What would be the payback period for the investment?

Accepted Answer

A)  0.25 years. 
B)  2.41 years. 
C)  4.00 years. 
D)  10.00 years. 
A)  0.25 years. 
B)  2.41 years. 
C)  4.00 years. 
D)  10.00 years.

Question 11

Suppose that your company has ample taxable income to take advantage of capital cost allowance (CCA)deductions and has the option to use either accelerated or straight-line method to calculate the CCA deductions.
Required:
Which method would you prefer? Why?

Accepted Answer

The accelerated method of capital cost a

Question 12

The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now, and the useful life of the project is ten years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the ten-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in ten years. Finney's discount rate is 16%. (Ignore income taxes in this problem.)
-What would the annual net cash inflows from this project have to be in order to justify investing in remodelling?

Accepted Answer

A)  $14,495. 
B)  $16,147. 
C)  $29,158. 
D)  $35,842. 
A)  $14,495. 
B)  $16,147. 
C)  $29,158. 
D)  $35,842.

Question 13

The Morgan Company has been awarded a six-year contract to provide repair service to a commercial bus line. Morgan Company has gathered the following data associated with the items needed for this contract:
 
The special equipment is in Class 7 with a maximum 15% CCA rate. The income tax rate is 40%, and Morgan's after-tax cost of capital is 14%. At the end of six years, the working capital will be released for use elsewhere.

-The present value of the total after-tax net cash inflows (outflows),excluding any CCA tax shield,in Year 4 is closest to which of the following?

Accepted Answer

A)  ($7,105). 
B)  $23,684. 
C)  $35,520. 
D)  $71,052. 
A)  ($7,105). 
B)  $23,684. 
C)  $35,520. 
D)  $71,052.

Question 14

Benz Company is considering the purchase of a machine that costs $100,000 and has a useful life of 18 years.The company's required discount rate is 12%.If the machine's net present value is $5,850,what must be the annual cash inflows associated with the machine,rounded to the nearest whole dollar? (Ignore income taxes in this problem.)

Accepted Answer

A)  $13,760. 
B)  $14,600. 
C)  $42,413. 
D)  They are impossible to determine from the data given. 
A)  $13,760. 
B)  $14,600. 
C)  $42,413. 
D)  They are impossible to determine from the data given.

Question 15

The Morgan Company has been awarded a six-year contract to provide repair service to a commercial bus line. Morgan Company has gathered the following data associated with the items needed for this contract:
 
The special equipment is in Class 7 with a maximum 15% CCA rate. The income tax rate is 40%, and Morgan's after-tax cost of capital is 14%. At the end of six years, the working capital will be released for use elsewhere.

-What is the total cash outlay needed to be made now?

Accepted Answer

A)  $300,000. 
B)  $360,000. 
C)  $380,000. 
D)  $400,000. 
A)  $300,000. 
B)  $360,000. 
C)  $380,000. 
D)  $400,000.

Question 16

The following data concern an investment project:

$\begin{array} { l r } 
\text { Investment in Equipment } & \$ 16,000 \
\text { Net Annual Cash Inflows } & \$ 3,600 \
\text { Working Capital Required } & \$ 4,500 \
\text { Salvage Value of the Equipment } & \$ 2,000 \
\text { Life of the Project } & 12 \text { years } \
\text { Discount Rate } & 14 \%
\end{array}$

The working capital will be released for use elsewhere at the conclusion of the project. (Ignore income taxes in this problem.)

Required:

Calculate the project's net present value.

Accepted Answer

None

Question 17

Arthur operates a part-time auto repair service.He estimates that a new diagnostic computer system will result in increased cash inflows of $2,100 in Year 1,$3,200 in Year 2,and $4,000 in Year 3.If Arthur's discount rate is 10%,what would be the maximum amount he should be willing to pay for the new computer system? (Ignore income taxes in this problem.)

Accepted Answer

A)  $6,652. 
B)  $6,984. 
C)  $7,556. 
D)  $7,747. 
A)  $6,652. 
B)  $6,984. 
C)  $7,556. 
D)  $7,747.

Question 18

The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value.The company has projected the following annual cash flows for the investment. $\begin{array} { l r } 
\text { Year } & \text { Cash Inflows } \
1 & \$ 120,000 \
2 & \$ 60,000 \
3 & \$ 40,000 \
4 & \$ 40,000 \
5 & \$ 40,000 \
\text { Total } & \$ 300,000
\end{array}$ Assuming that the cash inflows occur evenly over the year,what is the payback period for the investment? (Ignore income taxes in this problem.)

Accepted Answer

A)  0.75 years. 
B)  1.67 years. 
C)  2.50 years. 
D)  4.91 years. 
A)  0.75 years. 
B)  1.67 years. 
C)  2.50 years. 
D)  4.91 years.

Question 19

Oriental Company has gathered the following data on a proposed investment project:

The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.)
-What would be the simple rate of return on the investment?

Accepted Answer

A)  10%. 
B)  15%. 
C)  25%. 
D)  35%. 
A)  10%. 
B)  15%. 
C)  25%. 
D)  35%.

Question 20

Payson Company bought $40,000 worth of office equipment at the beginning of Year 1. This equipment has a useful life of eight years and a salvage value at the end of its useful life of $4,000. This equipment is in Class 7 with capital cost allowance (CCA) rate of 15%. The income tax rate is 40%.
-What is the maximum amount of CCA that the company can deduct for tax purposes for Year 1?

Accepted Answer

A)  $2,700. 
B)  $3,000. 
C)  $5,400. 
D)  $6,000. 
A)  $2,700. 
B)  $3,000. 
C)  $5,400. 
D)  $6,000.

At what amount should the capital cost allowance (CCA)tax shield be included in the calculation of the net present value of an investment project?

What is the capital budgeting method that divides a project's annual incremental net income by the initial investment?

Which of the following is a weakness of the internal rate of return method for screening investment projects?

A company anticipates a tax-deductible cash expense of $10,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 8%.What is the approximate present value of this future cash outflow?

The capital cost allowance (CCA)tax shield of a Class 7 asset with a maximum 15% CCA rate was $12,000 for Year 2.The income tax rate was 40%.What was the total CCA deduction for the asset for Year 2?

Oriental Company has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.) -What would be the payback period for the investment?

Suppose that your company has ample taxable income to take advantage of capital cost allowance (CCA)deductions and has the option to use either accelerated or straight-line method to calculate the CCA deductions. Required: Which method would you prefer? Why?

Oriental Company has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.) -What would be the simple rate of return on the investment?

Managerial Accounting and the Business Environment

Cost Terms, Concepts, and Classifications

Systems Design: Job-Order Costing

Systems Design: Process Costing

Activity-Based Costing: A Tool to Aid Decision Making

Cost Behaviour: Analysis and Use

Cost-Volume-Profit Relationships

Variable Costing: A Tool for Management

Budgeting

Standard Costs and Overhead Analysis

Reporting for Control

Relevant Costs for Decision Making

Financial Statement Analysis

Filters

Exam 13: Capital Budgeting Decisions

At what amount should the capital cost allowance (CCA)tax shield be included in the calculation of the net present value of an investment project?

What is the capital budgeting method that divides a project's annual incremental net income by the initial investment?

Which of the following is a weakness of the internal rate of return method for screening investment projects?

A company anticipates a tax-deductible cash expense of $10,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 8%.What is the approximate present value of this future cash outflow?

The capital cost allowance (CCA)tax shield of a Class 7 asset with a maximum 15% CCA rate was $12,000 for Year 2.The income tax rate was 40%.What was the total CCA deduction for the asset for Year 2?

Oriental Company has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.) -What would be the payback period for the investment?

Suppose that your company has ample taxable income to take advantage of capital cost allowance (CCA)deductions and has the option to use either accelerated or straight-line method to calculate the CCA deductions. Required: Which method would you prefer? Why?

Oriental Company has gathered the following data on a proposed investment project: The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.) -What would be the simple rate of return on the investment?

Managerial Accounting and the Business Environment

Cost Terms, Concepts, and Classifications

Systems Design: Job-Order Costing

Systems Design: Process Costing

Activity-Based Costing: A Tool to Aid Decision Making

Cost Behaviour: Analysis and Use

Cost-Volume-Profit Relationships

Variable Costing: A Tool for Management

Budgeting

Standard Costs and Overhead Analysis

Reporting for Control

Relevant Costs for Decision Making

Financial Statement Analysis

Filters