Question 1

Which of the following statements about the evaluation of an investment having uneven cash flows using the payback method is correct?

Accepted Answer

A)  It CANNOT be done. 
B)  It can be done only by matching cash inflows and investment outflows on a year-by-year basis. 
C)  It will produce essentially the same results as those obtained through the use of discounted cash flow techniques. 
D)  It requires the use of a sophisticated calculator or computer software. 
A)  It CANNOT be done. 
B)  It can be done only by matching cash inflows and investment outflows on a year-by-year basis. 
C)  It will produce essentially the same results as those obtained through the use of discounted cash flow techniques. 
D)  It requires the use of a sophisticated calculator or computer software.

Question 2

At the Bartholomew Company last year,all sales were for cash and all expenses were paid in cash.The tax rate was 30%.If the after-tax net cash inflow from these operations last year was $10,500,and if the total before-tax and tax-deductible cash expenses were $35,000,what must have been the total before-tax cash sales?

Accepted Answer

A)  $45,000. 
B)  $50,000. 
C)  $60,000. 
D)  $65,000. 
A)  $45,000. 
B)  $50,000. 
C)  $60,000. 
D)  $65,000.

Question 3

Vernal Company has been offered a seven-year contract to supply a part for the military.After careful study,the company has developed the following estimated data relating to the contract:

$\begin{array}{lccc}
\text { Cost of Equipment Needed } & \$ 300,000 \
\text { Working Capital Needed to Carry Inventories } & \$ 50,000 \
\text { Annual Net Cash Inflow } & \$ 90,000 \
\text { Salvage Value of Equipment } & \$ 10,000
\end{array}$

The equipment above would be in Class 7 with a 15% CCA rate. The company would take the maximum CCA allowable each year. It is not expected that the contract would be extended beyond the initial contract period. The company's after-tax cost of capital is 10%, and the tax rate is 30%.

Required:

Use net present value analysis to determine whether or not the contract should be accepted. (Round all calculations to the nearest dollar.)

Accepted Answer

The following is one approach to answer

Question 4

The Becker Company is interested in buying a piece of equipment. The following data have been assembled concerning this equipment:

This equipment is expected to have a useful life of six years. At the end of the sixth year, the working capital would be released for use elsewhere. The company's discount rate is 10%. (Ignore income taxes in this problem.)

-The present value of the net cash flows (all cash inflows minus all cash outflows)occurring during year six is closest to which of the following?

Accepted Answer

A)  $107,200. 
B)  $152,280. 
C)  $195,900. 
D)  $270,000. 
A)  $107,200. 
B)  $152,280. 
C)  $195,900. 
D)  $270,000.

Question 5

Kane Company is in the process of purchasing a new machine for its production line.It is near the end of the year,and the machine is being offered at a special discount if purchased before the end of the year.Kane has determined that the capital cost allowance (CCA)deduction on the new machine for the year of purchase would be $13,000.The tax rate is 30%.If Kane purchases the machine and reports a positive net income for the year,what would be the tax savings from the CCA tax shield related to this machine for the year of purchase?

Accepted Answer

A)  $0. 
B)  $3,900. 
C)  $9,100. 
D)  $13,000. 
A)  $0. 
B)  $3,900. 
C)  $9,100. 
D)  $13,000.

Question 6

Suppose an investment has cash inflows of R dollars at the end of each year for two years.What will be the present value of these cash inflows using a 12% discount rate?

Accepted Answer

A)  Greater than under a 10% discount rate. 
B)  Less than under a 10% discount rate. 
C)  Equal to that under a 10% discount rate. 
D)  Sometimes greater than under a 10% discount rate and sometimes less; it depends on R. 
A)  Greater than under a 10% discount rate. 
B)  Less than under a 10% discount rate. 
C)  Equal to that under a 10% discount rate. 
D)  Sometimes greater than under a 10% discount rate and sometimes less; it depends on R.

Question 7

By what amount does a capital cost allowance (CCA)deduction reduce income taxes?

Accepted Answer

A)  One minus the tax rate multiplied by the amount of the CCA deduction. 
B)  The tax rate multiplied by the amount of the CCA deduction. 
C)  The amount of the CCA deduction. 
D)  The amount of the CCA deduction divided by one minus the tax rate. 
A)  One minus the tax rate multiplied by the amount of the CCA deduction. 
B)  The tax rate multiplied by the amount of the CCA deduction. 
C)  The amount of the CCA deduction. 
D)  The amount of the CCA deduction divided by one minus the tax rate.

Question 8

When the net present value method is used,the internal rate of return is the discount rate used to compute the net present value of a project.

Accepted Answer

A) True 
 B)False

Question 9

The preference rule for ranking projects by the profitability index is the following: the higher the profitability index,the more desirable the project.

Accepted Answer

A) True 
 B)False

Question 10

Beaver Company had taxable cash sales of $400,000 in Year 1. Tax-deductible cash expenses in Year 1 were $140,000, and capital cost allowance (CCA) deductions were $60,000. The income tax rate was 40%.
-What was the after-tax net cash inflow from all sources for Year 1?

Accepted Answer

A)  $104,000. 
B)  $156,000. 
C)  $180,000. 
D)  $216,000. 
A)  $104,000. 
B)  $156,000. 
C)  $180,000. 
D)  $216,000.

Question 11

The Becker Company is interested in buying a piece of equipment. The following data have been assembled concerning this equipment:

This equipment is expected to have a useful life of six years. At the end of the sixth year, the working capital would be released for use elsewhere. The company's discount rate is 10%. (Ignore income taxes in this problem.)

-The present value of all future annual operating cash inflows is closest to which of the following?

Accepted Answer

A)  $278,700. 
B)  $348,400. 
C)  $452,300. 
D)  $480,000. 
A)  $278,700. 
B)  $348,400. 
C)  $452,300. 
D)  $480,000.

Question 12

A planned factory expansion project has an estimated initial cost of $800,000.Using a discount rate of 20%,the present value of future cost savings from the expansion is $843,000.To yield exactly a 20% internal rate of return,the actual investment cost cannot exceed the $800,000 estimate by more than which of the following? (Ignore income taxes in this problem.)

Accepted Answer

A)  $1,075. 
B)  $20,000. 
C)  $43,000. 
D)  $160,000. 
A)  $1,075. 
B)  $20,000. 
C)  $43,000. 
D)  $160,000.

Question 13

The following data pertain to an investment proposal: $\begin{array} { l r } 
\text { Present Investment Required } & \$ 27,130 \
\text { Annual Cost Savings } & \$ 5,000 \
\text { Projected Life of the Investment } & 10 \text { years } \
\text { Projected Salvage Value } & \$ - 0 -
\end{array}$ Using appropriate present value tables (3 decimal places),what would be the internal rate of return? (Ignore income taxes in this problem.)

Accepted Answer

A)  5.426%. 
B)  13.0%. 
C)  54.26%. 
D)  542.6%. 
A)  5.426%. 
B)  13.0%. 
C)  54.26%. 
D)  542.6%.

Question 14

The working capital required at the start of an investment is a tax deductible cash outflow.

Accepted Answer

A) True 
 B)False

Question 15

Kipling Company has invested in a project that has an eight-year life.It is expected that the annual cash inflow from the project will be $20,000.Assuming that the project has an internal rate of return of 12%,how much was the initial investment in the project? (Ignore income taxes in this problem.)

Accepted Answer

A)  $64,640. 
B)  $80,800. 
C)  $99,360. 
D)  $160,000. 
A)  $64,640. 
B)  $80,800. 
C)  $99,360. 
D)  $160,000.

Question 16

AB Company is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its six-year useful life. The machine will cost $83,150 and has no salvage value. The machine has a 20% internal rate of return. (Ignore income taxes in this problem.)

Required:

What is the annual cost savings promised by the machine?

Accepted Answer

Investment required/Net annual

Question 17

Manti Company purchased a new machine on January 2, Year 1. Cost and other data relating to the machine follow:

The machine is in Class 7 with a maximum 15% CCA rate. Manti uses an after-tax discount rate of 12% for capital budgeting decisions. The income tax rate is 40%.
-If Manti deducts the maximum CCA for tax purposes,what will be the approximate present value (as of January 2,Year 1)of the CCA tax shield for Year 2?

Accepted Answer

A)  $6,193. 
B)  $7,700. 
C)  $9,291. 
D)  $19,425. 
A)  $6,193. 
B)  $7,700. 
C)  $9,291. 
D)  $19,425.

Question 18

Joe Flubup is the president of Flubup,Inc.He is considering buying a new machine that would cost $25,470.Joe has determined that the new machine promises an internal rate of return of 14%,but Joe has misplaced the paper which tells the annual cost savings promised by the new machine.He does remember that the machine has a projected life of 12 years.Based on these data,what are the annual cost savings? (Ignore income taxes in this problem.)

Accepted Answer

A)  Impossible to determine from the data given. 
B)  $2,122.50. 
C)  $4,500.00. 
D)  $4,650.00. 
A)  Impossible to determine from the data given. 
B)  $2,122.50. 
C)  $4,500.00. 
D)  $4,650.00.

Question 19

If the net present value of a project is zero,based on a discount rate of 16%,which of the following statements about the project's internal rate of return is correct?

Accepted Answer

A)  It is equal to 16%. 
B)  It is less than 16%. 
C)  It is greater than 16%. 
D)  It cannot be determined from the information given. 
A)  It is equal to 16%. 
B)  It is less than 16%. 
C)  It is greater than 16%. 
D)  It cannot be determined from the information given.

Question 20

Eureka Company is considering replacing an old computer with a new computer. The following data relate to this investment decision:

The new computer will belong to Class 10 with a maximum CCA rate of 30%. The income tax rate is also 30%, and the company's after-tax cost of capital is 12%
-What is the approximate present value of the after-tax net annual cash operating inflows for all years?

Accepted Answer

A)  $12,334. 
B)  $23,024. 
C)  $28,777. 
D)  $41,114. 
A)  $12,334. 
B)  $23,024. 
C)  $28,777. 
D)  $41,114.

Which of the following statements about the evaluation of an investment having uneven cash flows using the payback method is correct?

Suppose an investment has cash inflows of R dollars at the end of each year for two years.What will be the present value of these cash inflows using a 12% discount rate?

By what amount does a capital cost allowance (CCA)deduction reduce income taxes?

When the net present value method is used,the internal rate of return is the discount rate used to compute the net present value of a project.

The preference rule for ranking projects by the profitability index is the following: the higher the profitability index,the more desirable the project.

Beaver Company had taxable cash sales of $400,000 in Year 1. Tax-deductible cash expenses in Year 1 were $140,000, and capital cost allowance (CCA) deductions were $60,000. The income tax rate was 40%. -What was the after-tax net cash inflow from all sources for Year 1?

The working capital required at the start of an investment is a tax deductible cash outflow.

Kipling Company has invested in a project that has an eight-year life.It is expected that the annual cash inflow from the project will be $20,000.Assuming that the project has an internal rate of return of 12%,how much was the initial investment in the project? (Ignore income taxes in this problem.)

If the net present value of a project is zero,based on a discount rate of 16%,which of the following statements about the project's internal rate of return is correct?

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

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Exam 13: Capital Budgeting Decisions

Which of the following statements about the evaluation of an investment having uneven cash flows using the payback method is correct?

Suppose an investment has cash inflows of R dollars at the end of each year for two years.What will be the present value of these cash inflows using a 12% discount rate?

By what amount does a capital cost allowance (CCA)deduction reduce income taxes?

When the net present value method is used,the internal rate of return is the discount rate used to compute the net present value of a project.

The preference rule for ranking projects by the profitability index is the following: the higher the profitability index,the more desirable the project.

Beaver Company had taxable cash sales of $400,000 in Year 1. Tax-deductible cash expenses in Year 1 were $140,000, and capital cost allowance (CCA) deductions were $60,000. The income tax rate was 40%. -What was the after-tax net cash inflow from all sources for Year 1?

The working capital required at the start of an investment is a tax deductible cash outflow.

If the net present value of a project is zero,based on a discount rate of 16%,which of the following statements about the project's internal rate of return is correct?

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