Question 1

A company's after tax cash flows are not normally affected by:

Accepted Answer

A) revenues. 
B) operating expenses. 
C) gains on the sale of assets. 
D) losses on the sale of assets. 
E) the purchase of an asset. 
A) revenues. 
B) operating expenses. 
C) gains on the sale of assets. 
D) losses on the sale of assets. 
E) the purchase of an asset. E

Question 2

Regal Interiors is considering a $6.8 million asset investment that has a six-year service life and a $700,000 salvage value. The investment is expected to produce annual savings in cash operating costs of $904,000 and will require a $600,000 overhaul in year 5, which is fully deductible for tax purposes.
Regal uses the net-present-value method to analyze investments. Asset investments are depreciated by the straight-line method.
Required:
A. Ignoring income taxes, determine the (pre-discounted) cash-flow amounts that would be used in a net-present-value analysis for (1) the asset acquisition, (2) annual savings in cash operating costs, (3) annual straight-line depreciation, (4) the overhaul in year 5, and (5) disposal of the asset in year 6. Note cash outflows in parentheses.
B. Repeat requirement "A," assuming the company is subject to a 20% income tax rate.

Accepted Answer

A.
(1) Asset acquisition: $(6,800,000)
(2) Annual savings in cash operating costs: $904,000
(3) Annual straight-line depreciation: $0 -depreciation is a non-cash item.
(4) Year 5 overhaul: $(600,000)
(5) Year 6 asset disposal: $700,000
B.
(1) Asset acquisition: $(6,800,000)
(2) Annual savings in cash operating costs: $904,000 x 0.8 = $723,200
(3) Annual straight-line depreciation: $6,800,000 ÷ 5 years = $1,220,000; $1,220,000 x 0.2 = $244,000
(4) Year 3 overhaul: $(600,000) x 0.8 = $(480,000)
(5) Year 6 asset disposal: $6,800,000 - ($1,220,000 x 5) accumulated depreciation = $700,000 book value; $700,000 book value - $700,000 salvage value = $0 gain.

Question 3

Bleeker Corporation plans to generate $450,000 of sales revenue if the implementation of their planned capital project moves forward. Assuming a 28% tax rate, the sales revenue should be reflected in the analysis by a:

Accepted Answer

A) $126,000 inflow. 
B) $324,000 inflow. 
C) $324,000 outflow. 
D) $450,000 inflow. 
E) $450,000 outflow. 
A) $126,000 inflow. 
B) $324,000 inflow. 
C) $324,000 outflow. 
D) $450,000 inflow. 
E) $450,000 outflow. B

Question 4

Gotham Corporation is considering the acquisition of a new machine that costs $149,040. The machine is expected to have a four-year service life and will produce annual savings in cash operating costs of $45,000. Gotham evaluates investments by using the internal rate of return and ignores income taxes.
Required:
A. Briefly define the internal rate of return.
B. What relationship holds true at the internal rate of return with respect to discounted cash inflows and discounted cash outflows? With respect to net present value?
C. Compute the machine's internal rate of return.

Accepted Answer

A. The internal rate of return is the tr

Question 5

Consider the five items below that follow, which are related to independent investment opportunities.
Purchase price of a new machine: $850,000
Annual straight-line depreciation: $75,000
Annual savings in cash operating costs: $120,000
Advertising expenses related to a new marketing campaign in year 2: $35,000
Sale of an asset in year 6: Loss on sale, $60,000; proceeds received by seller, $23,000
Required:
Complete the following table, inserting the (pre-discounted) cash flow amounts that would be used in a net-present-value analysis. Column A should be completed based on the assumption of no income taxes; in contrast, Column B should be completed assuming the relevant company is subject to a 30% income tax rate. Be sure to note cash outflows in parentheses.

Accepted Answer

None

Question 6

When income taxes are considered in capital budgeting, the cash flows would be correctly figured by

Accepted Answer

A) adding the result of multiplying (depreciation expense x tax rate). 
B) adding the result of multiplying [depreciation expense x (1 - tax rate)]. 
C) subtracting the result of multiplying (depreciation expense x tax rate). 
D) subtracting the result of multiplying [depreciation expense x (1 - tax rate)]. 
E) doing nothing because there is no cash paid for depreciation. 
A) adding the result of multiplying (depreciation expense x tax rate). 
B) adding the result of multiplying [depreciation expense x (1 - tax rate)]. 
C) subtracting the result of multiplying (depreciation expense x tax rate). 
D) subtracting the result of multiplying [depreciation expense x (1 - tax rate)]. 
E) doing nothing because there is no cash paid for depreciation.

Question 7

Pick Company received $18,000 cash from the sale of a machine that had a $13,000 book value. If the company is subject to a 30% income tax rate, the net cash flow to use in a discounted-cash-flow analysis would be:

Accepted Answer

A) $3,500. 
B) $6,500. 
C) $12,600. 
D) $16,500. 
E) $19,500. 
A) $3,500. 
B) $6,500. 
C) $12,600. 
D) $16,500. 
E) $19,500.

Question 8

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 9

Vandelay International is planning a project that is expected to last for six years and generate annual net cash inflows of $75,000. The project will require the purchase of a $280,000 machine, which is expected to have a salvage value of $10,000 at the end of the six-year period. In addition to annual operating costs, the machine will require a $50,000 overhaul at the end of the fourth year. The company presently has a 12% minimum desired rate of return.
Based on this information, accountant Division Manager prepared the following analysis: Annual net cash inflow
Annual depreciation   $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$$\$ 45,000$
Annual average cost of overhaul   $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$ $ \quad$$\underline {8.333}$
Average annual mcome
Return on investment $= \$ 21,667 \div \$ 280,000 = 7.74 \%$ The Division Manager recommends that the project be rejected because it does not meet the company's minimum desired rate of return. Ignore income taxes.
Required:
A. What criticism(s) would you make of the accountant's evaluation?
B. Use the net-present-value method and determine whether the project should be accepted.
C. Based on your answer in requirement "B," is the internal rate of return greater or less than 12%? Explain.

Accepted Answer

A. The Division Manager is focusing on i

Question 10

An increased number of companies are investing in advanced manufacturing systems.
Required:
A. Many proposed advanced manufacturing systems have a negative net present value when discounted-cash-flow analysis is used. Explain several causes of this situation.
B. Two major benefits of advanced systems are greater flexibility in the manufacturing process and improvements in product quality. Explain how these benefits can create problems when performing discounted-cash-flow analysis.

Accepted Answer

A. Negative net present values may arise

Question 11

Custom Plastics plans to purchase $4.5 million of equipment in the not-too-distant future. The equipment will have a $600,000 salvage value and will be depreciated over a six-year service life by the straight-line method. 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.
B. Determine the discounted cash flow that would be reflected in the analysis in year 6, assuming that Custom sells the equipment for only $450,000 because of a recent change in market conditions.

Accepted Answer

None

Question 12

Impass Limited is considering the acquisition of a new machine that costs $402,000. The machine is expected to have a six-year service life and will produce annual savings in cash operating costs of $75,000. Impass uses straight-line depreciation, is subject to a 23% income tax rate, has an after-tax hurdle rate of 10%, and rounds calculations to the nearest dollar.
Required:
A. Determine the annual after-tax cash flows that result from acquisition of the machine.
B. Assuming that your answer in requirement "A" totalled $98,470, calculate the machine's:
1. Net present value. Is the machine an attractive investment? Why?
2. Internal rate of return. Is the machine an attractive investment? Why?
3. Payback period.

Accepted Answer

A. Cash operating costs: @#LAT-DLM&
Depreciation t

Question 13

Capital-budgeting decisions primarily involve:

Accepted Answer

A) emergency situations. 
B) long-term decisions. 
C) short-term planning situations. 
D) cash inflows and outflows in the current year. 
E) planning for the acquisition of capital. 
A) emergency situations. 
B) long-term decisions. 
C) short-term planning situations. 
D) cash inflows and outflows in the current year. 
E) planning for the acquisition of capital.

Question 14

In Canada, the allowable deduction for depreciation expense in the calculation of taxable income is called:

Accepted Answer

A) depreciation expense. 
B) the CCA tax shield. 
C) the present value of the CCA tax shield. 
D) capital cost allowance. 
E) undepreciated capital cost. 
A) depreciation expense. 
B) the CCA tax shield. 
C) the present value of the CCA tax shield. 
D) capital cost allowance. 
E) undepreciated capital cost.

Question 15

A machine is expected to produce annual savings in cash operating costs of $400,000 for the next six years. If the company has a 10% after-tax hurdle rate and is subject to a 30% income tax rate, the correct discounted net cash flow would be:

Accepted Answer

A) $522,600. 
B) $947,520. 
C) $1,219,400. 
D) $1,680,000. 
E) $1,742,000. 
A) $522,600. 
B) $947,520. 
C) $1,219,400. 
D) $1,680,000. 
E) $1,742,000.

Question 16

When a manager applies a net present value analysis using a just-in-time philosophy, they are least likely to encounter:

Accepted Answer

A) hurdle rates that are set too high. 
B) time horizons that are set too short. 
C) high uncertainties with respect to future operating cash flows. 
D) biases with respect to small, incremental projects. 
E) non value-added costs. 
A) hurdle rates that are set too high. 
B) time horizons that are set too short. 
C) high uncertainties with respect to future operating cash flows. 
D) biases with respect to small, incremental projects. 
E) non value-added costs.

Question 17

Both net present value (NPV) and the internal rate of return (IRR) have a reinvestment assumption.
Required:
A. State the assumption for each method.
B. One of the advantages of the NPV method is that users can adjust for risk considerations. Explain how this is done.

Accepted Answer

A. In the NPV method, cash flows are ass

Question 18

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:

Accepted Answer

A) adding the result of multiplying (advertising expense x tax rate). 
B) adding the tax rate. 
C) adding the result of multiplying [advertising expense x (1 - tax rate)]. 
D) subtracting the result of multiplying (advertising expense x tax rate). 
E) subtracting the result of multiplying [advertising expense x (1 - tax rate)]. 
A) adding the result of multiplying (advertising expense x tax rate). 
B) adding the tax rate. 
C) adding the result of multiplying [advertising expense x (1 - tax rate)]. 
D) subtracting the result of multiplying (advertising expense x tax rate). 
E) subtracting the result of multiplying [advertising expense x (1 - tax rate)].

Question 19

Which of the following choices correctly depicts whether discounted cash flows are used by the method noted when evaluating long-term investments? $$\begin{array} { | l | c | c | c | c | c |c| } 
\hline & &\begin{array} { c } 
\text { Net } \
\text { Present Value }
\end{array} & \begin{array} { c } 
\text { Internal Rate } \
\text { of Return }
\end{array} & &\begin{array} { c } 
\text { Accounting } \
\text { Rate of Return }
\end{array} \
\hline 1 && \text { No } &  \text { No } & &\text { Yes } \
\hline 2 && \text { Yes } &  \text { No } & &\text { Yes } \
\hline 3 && \text { Yes } &  \text { No } & & \text { No } \
\hline 4 && \text { Yes } &  \text { Yes } & & \text { No } \
\hline 5 && \text { Yes } &  \text { Yes } & & \text { Yes } \
\hline
\end{array}$$

Accepted Answer

A) 1 
B) 2 
C) 3 
D) 4 
E) 5 
A) 1 
B) 2 
C) 3 
D) 4 
E) 5

Question 20

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.

A company's after tax cash flows are not normally affected by:

Bleeker Corporation plans to generate $450,000 of sales revenue if the implementation of their planned capital project moves forward. Assuming a 28% tax rate, the sales revenue should be reflected in the analysis by a:

When income taxes are considered in capital budgeting, the cash flows would be correctly figured by

Pick Company received $18,000 cash from the sale of a machine that had a $13,000 book value. If the company is subject to a 30% income tax rate, the net cash flow to use in a discounted-cash-flow analysis would be:

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

Capital-budgeting decisions primarily involve:

In Canada, the allowable deduction for depreciation expense in the calculation of taxable income is called:

A machine is expected to produce annual savings in cash operating costs of $400,000 for the next six years. If the company has a 10% after-tax hurdle rate and is subject to a 30% income tax rate, the correct discounted net cash flow would be:

When a manager applies a net present value analysis using a just-in-time philosophy, they are least likely to encounter:

Both net present value (NPV) and the internal rate of return (IRR) have a reinvestment assumption. Required: A. State the assumption for each method. B. One of the advantages of the NPV method is that users can adjust for risk considerations. Explain how this is done.

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:

Which of the following choices correctly depicts whether discounted cash flows are used by the method noted when evaluating long-term investments? Net Present Value Internal Rate of Return Accounting Rate of Return 1 No No Yes 2 Yes No Yes 3 Yes No No 4 Yes Yes No 5 Yes Yes Yes

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

The Changing Role of Managerial Accounting

Basic Cost Management Concepts

Product Costing and Cost Accumulation

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis, Cost Behaviour, and Cost Estimation

Cost-Volume-Profit Analysis, Absorption and Variable Costing

Profit Planning and Activity-Based Budgeting

Standard Costing and Flexible Budgeting

Cost Management Tools

Responsibility Accounting, Investment Centres, 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

Filters

Exam 14: Capital Expenditure Decisions

A company's after tax cash flows are not normally affected by:

Bleeker Corporation plans to generate $450,000 of sales revenue if the implementation of their planned capital project moves forward. Assuming a 28% tax rate, the sales revenue should be reflected in the analysis by a:

When income taxes are considered in capital budgeting, the cash flows would be correctly figured by

Pick Company received $18,000 cash from the sale of a machine that had a $13,000 book value. If the company is subject to a 30% income tax rate, the net cash flow to use in a discounted-cash-flow analysis would be:

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

Capital-budgeting decisions primarily involve:

In Canada, the allowable deduction for depreciation expense in the calculation of taxable income is called:

A machine is expected to produce annual savings in cash operating costs of $400,000 for the next six years. If the company has a 10% after-tax hurdle rate and is subject to a 30% income tax rate, the correct discounted net cash flow would be:

When a manager applies a net present value analysis using a just-in-time philosophy, they are least likely to encounter:

Both net present value (NPV) and the internal rate of return (IRR) have a reinvestment assumption. Required: A. State the assumption for each method. B. One of the advantages of the NPV method is that users can adjust for risk considerations. Explain how this is done.

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:

Which of the following choices correctly depicts whether discounted cash flows are used by the method noted when evaluating long-term investments? Net Present Value Internal Rate of Return Accounting Rate of Return 1 No No Yes 2 Yes No Yes 3 Yes No No 4 Yes Yes No 5 Yes Yes Yes

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

The Changing Role of Managerial Accounting

Basic Cost Management Concepts

Product Costing and Cost Accumulation

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis, Cost Behaviour, and Cost Estimation

Cost-Volume-Profit Analysis, Absorption and Variable Costing

Profit Planning and Activity-Based Budgeting

Standard Costing and Flexible Budgeting

Cost Management Tools

Responsibility Accounting, Investment Centres, 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

Filters