Question 1

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 2

An increase in the discount rate will result in an increase in the present value of a given cash flow.

Accepted Answer

A) True 
 B)False

Question 3

The Becker Company is interested in buying a piece of equipment. The following data have been assembled concerning this equipment:
$\begin{array}{|l|r|}
\hline \text { Cost of Required Equipment } & \$ 250,000 \
\hline \text { Working capital required } & \$ 100,000 \
\hline \text { Annual operating cash inflows } & \$ 80,000 \
\hline \text { Cash repair at End of Four years } & \$ 40,000 \
\hline \text { Salvage Value at End of Six Years } & \$ 90,000 \
\hline
\end{array}$
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 net present value of this investment is closest to which of the following? Do not round your intermediate calculations.)

Accepted Answer

A)  $78,350. 
B)  $21,904. 
C)  $27,548. 
D)  $54,640. 
A)  $78,350. 
B)  $21,904. 
C)  $27,548. 
D)  $54,640.

Question 4

When a company invests in equipment,it gets to immediately expense the cost of the equipment on the company's income tax return filed with Canada Customs and Revenue Agency (CCRA).

Accepted Answer

A) True 
 B)False

Question 5

Last year,the sales at Seidelman Company were $700,000 and were all cash sales.The company's tax-deductible expenses were $450,000 and were all cash expenses.The tax rate was 35%.What was the after-tax net cash inflow at Seidelman last year?

Accepted Answer

A)  $87,500. 
B)  $162,500. 
C)  $250,000. 
D)  $700,000. 
A)  $87,500. 
B)  $162,500. 
C)  $250,000. 
D)  $700,000.

Question 6

The Becker Company is interested in buying a piece of equipment. The following data have been assembled concerning this equipment:
$\begin{array}{|l|r|}
\hline \text { Cost of Required Equipment } & \$ 250,000 \
\hline \text { Working capital required } & \$ 100,000 \
\hline \text { Annual operating cash inflows } & \$ 80,000 \
\hline \text { Cash repair at End of Four years } & \$ 40,000 \
\hline \text { Salvage Value at End of Six Years } & \$ 90,000 \
\hline
\end{array}$
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? (Do not round your intermediate calculations.)

Accepted Answer

A)  $278,700. 
B)  $348,421. 
C)  $452,301. 
D)  $480,000. 
A)  $278,700. 
B)  $348,421. 
C)  $452,301. 
D)  $480,000.

Question 7

Stratford Company purchased a machine with an estimated useful life of seven years.The machine will generate cash inflows of $90,000 each year over the next seven years.If the machine has no salvage value at the end of seven years,and assuming the company's discount rate is 10%,what is the purchase price of the machine if the net present value of the investment is $170,000? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

Accepted Answer

A)  $170,000. 
B)  $221,950. 
C)  $268,158. 
D)  $608,157. 
A)  $170,000. 
B)  $221,950. 
C)  $268,158. 
D)  $608,157.

Question 8

Mark Stevens is considering opening a hobby and craft store.He would need $100,000 to equip the business and another $40,000 for inventories and other working capital needs.Rent for the building to be used by the business will be $24,000 per year.Mark estimates that the annual cash inflow from the business will amount to $90,000.In addition to building rent,annual cash outflow for operating costs will amount to $30,000.Mark plans to operate the business for only six years.He estimates that the equipment and furnishings could be sold at that time for 10% of their original cost.Mark uses a discount rate of 16%.(Ignore income taxes in this problem.)
Required:
Would you advise Mark to make this investment? Use the net present value method.

Accepted Answer

@#IMG-DLM&
@#IMG-DLM& NPV = $13,172.60.Calculated

Question 9

Prince Company's required rate of return is 10%.The company is considering the purchase of three machines,as indicated below.Consider each machine independently.(Ignore income taxes in this problem.)
Required:
a)Machine A will cost $25,000 and will have a useful life of 15 years.Its salvage value will be $1,000,and cost savings are projected at $3,500 per year.Calculate the machine's net present value.
b)How much should Prince Company be willing to pay for Machine B if the machine promises annual cash inflows of $5,000 per year for eight years?
c)Machine C has a projected life of ten years.What is the machine's internal rate of return if it costs $31,296 and will save $6,000 annually in cash operating costs? Would you recommend to Prince Company to purchase Machine C? Explain.

Accepted Answer

a)
 @#IMG-DLM& NPV = $1,860.67.Calculated using th

Question 10

A piece of equipment, acquired in Year 1, belongs to Class 7 with a maximum CCA rate of 15%. The income tax rate is 40%. The tax savings (before discounting) from the CCA tax shield were $2,830.50 for Year 3. The after-tax cost of capital is 10%.
- What was the present value of the tax savings from the CCA tax shield in year 3 to the nearest dollar?

Accepted Answer

A)  $1,132. 
B)  $1,698. 
C)  $2,127. 
D)  $2,831. 
A)  $1,132. 
B)  $1,698. 
C)  $2,127. 
D)  $2,831.

Question 11

A company anticipates a capital cost allowance (CCA)deduction of $70,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 14%.What is the approximate present value of the CCA tax shield resulting from this deduction? (Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

Accepted Answer

A)  $16,159. 
B)  $21,000. 
C)  $37,704. 
D)  $49,000. 
A)  $16,159. 
B)  $21,000. 
C)  $37,704. 
D)  $49,000.

Question 12

Capital cost allowance (CCA)deductions shield revenues from taxation and thereby lower the amount of taxes that a company must pay.

Accepted Answer

A) True 
 B)False

Question 13

Layton Company is replacing an old delivery van with a new van. The following data relate to this investment decision:
$\begin{array}{|l|r|}
\hline \text { Cost of the new van now } & \$ 20,000 \
\hline \text { Annual cash operating costs of the new Van } & \$ 6,000 \
\hline \text { Useful life of the new van } & 6 \text { years } \
\hline \text { Salvage value of the van at the End of six years } & \$ 2,000 \
\hline \text { Original cost of the old van two years ago } & \$ 18,000 \
\hline \text { Book value of the old van now } & \$ 4,000 \
\hline \text { Salvage value of the old van now } & \$ 1,000 \
\hline \text { Salvage value of the old van six year from now } & \$ 200 \
\hline \text { Annual Cash operating Costs of the old van } & \$ 8,000 \
\hline
\end{array}$
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 incremental cash outlay now for the purchase of the new van?

Accepted Answer

A)  $17,000. 
B)  $19,000. 
C)  $20,000. 
D)  $21,000. 
A)  $17,000. 
B)  $19,000. 
C)  $20,000. 
D)  $21,000.

Question 14

Which of the following capital budgeting techniques consider(s)cash flow over the entire life of the project?
$\begin{array}{|l|l|}
\hline \text { Internal Rate of Return } & \text { Payback } \
\hline \text { A) Yes } & \text { Yes } \
\hline \text { B) Yes } & \text { No } \
\hline \text { C) No } & \text { Yes } \
\hline \text { D) No } & \text { No } \
\hline
\end{array}$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 15

Given the following data:
$\begin{array}{|l|r|}
\hline \text { Present Investment Required } & \$ 12,000 \
\hline \text { Net Present Value } & \$ 430 \
\hline \text { Annual cost Savings } & \$ ? \
\hline \text { Discount Rate } & 12 \% \
\hline
\end{array}$
$$\begin{array} {| l | l| } 
\hline \text { Life of the Project } & \text { 10years } \
\hline
\end{array}$$
Based on the data given,what would be the profitability index? (Ignore income taxes in this problem.)

Accepted Answer

A)  3.05%. 
B)  35.8%. 
C)  3.58%. 
D)  Cannot be determined from the information given. 
A)  3.05%. 
B)  35.8%. 
C)  3.58%. 
D)  Cannot be determined from the information given.

Question 16

Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions.The auto was purchased for $9,000 and will have a six-year useful life and a $3,000 salvage value.Delivering prescriptions (which the pharmacy has never done before)should increase gross revenues by at least $5,000 per year.The cost of these prescriptions to the pharmacy will be about $2,000 per year.The pharmacy depreciates all assets using the straight-line method.What is the payback period for the auto? (Ignore income taxes in this problem.)

Accepted Answer

A)  1.2 years. 
B)  1.8 years. 
C)  2.0 years. 
D)  3.0 years. 
A)  1.2 years. 
B)  1.8 years. 
C)  2.0 years. 
D)  3.0 years.

Question 17

Layton Company is replacing an old delivery van with a new van. The following data relate to this investment decision:
$\begin{array}{|l|r|}
\hline \text { Cost of the new van now } & \$ 20,000 \
\hline \text { Annual cash operating costs of the new Van } & \$ 6,000 \
\hline \text { Useful life of the new van } & 6 \text { years } \
\hline \text { Salvage value of the van at the End of six years } & \$ 2,000 \
\hline \text { Original cost of the old van two years ago } & \$ 18,000 \
\hline \text { Book value of the old van now } & \$ 4,000 \
\hline \text { Salvage value of the old van now } & \$ 1,000 \
\hline \text { Salvage value of the old van six year from now } & \$ 200 \
\hline \text { Annual Cash operating Costs of the old van } & \$ 8,000 \
\hline
\end{array}$
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 18

Bugle's Bagel Bakery is investigating the purchase of a new bagel-making machine. This machine would provide an annual operating cost savings of $3,650 for each of the next four years. In addition, this new machine would allow the production of one new type of bagel that would result in selling 1,500 dozen more bagels each year. The company earns a contribution margin of $0.90 on each dozen bagels sold. The purchase price of this machine is $13,450, and it will have a four-year useful life. Bugle's discount rate is 14%. (Ignore income taxes in this problem.)
- The internal rate of return for this investment is closest to which of the following?

Accepted Answer

A)  14%. 
B)  16%. 
C)  18%. 
D)  20%. 
A)  14%. 
B)  16%. 
C)  18%. 
D)  20%.

Question 19

Overland Company has gathered the following data on a proposed investment project:
$\begin{array}{|l|r|}
\hline \text { Investment in Depreciable Equipment } & \$ 150,000 \
\hline \text { Annual Cash Flows } & \$ 40,000 \
\hline \text { Life of the Equipment } & 10 \text { years } \
\hline \text { Salvage Value } & -0 \
\hline
\end{array}$
$$\begin{array} { | l | l |} 
\hline \text { Discourt Rate } & 10 \%\\hline
\end{array}$$
The internal rate of return on this investment is closest to which of the following? (Ignore income taxes in this problem.)

Accepted Answer

A)  10%. 
B)  Less than 10%. 
C)  Between 10% and 20%. 
D)  Greater than 20%. 
A)  10%. 
B)  Less than 10%. 
C)  Between 10% and 20%. 
D)  Greater than 20%.

Question 20

To determine the effect of income taxes on a project,multiply the net present value of the project by one minus the tax rate.

Accepted Answer

A) True 
 B)False

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.

An increase in the discount rate will result in an increase in the present value of a given cash flow.

When a company invests in equipment,it gets to immediately expense the cost of the equipment on the company's income tax return filed with Canada Customs and Revenue Agency (CCRA).

Last year,the sales at Seidelman Company were $700,000 and were all cash sales.The company's tax-deductible expenses were $450,000 and were all cash expenses.The tax rate was 35%.What was the after-tax net cash inflow at Seidelman last year?

Capital cost allowance (CCA)deductions shield revenues from taxation and thereby lower the amount of taxes that a company must pay.

Which of the following capital budgeting techniques consider(s)cash flow over the entire life of the project? Internal Rate of Return Payback A) Yes Yes B) Yes No C) No Yes D) No No

Given the following data: Present Investment Required \ 12,000 Net Present Value \ 430 Annual cost Savings \ ? Discount Rate 12\% Life of the Project 10years Based on the data given,what would be the profitability index? (Ignore income taxes in this problem.)

To determine the effect of income taxes on a project,multiply the net present value of the project by one minus the tax rate.

Managerial Accounting and the Business Environment

Cost Terms,concepts,and Classifications

Cost Behaviour: Analysis and Use

Cost-Volume-Profit Relationships

Systems Design: Job-Order Costing

Systems Design: Process Costing

Activity-Based Costing: A Tool to Aid Decision Making

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

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.

An increase in the discount rate will result in an increase in the present value of a given cash flow.

When a company invests in equipment,it gets to immediately expense the cost of the equipment on the company's income tax return filed with Canada Customs and Revenue Agency (CCRA).

Last year,the sales at Seidelman Company were $700,000 and were all cash sales.The company's tax-deductible expenses were $450,000 and were all cash expenses.The tax rate was 35%.What was the after-tax net cash inflow at Seidelman last year?

Capital cost allowance (CCA)deductions shield revenues from taxation and thereby lower the amount of taxes that a company must pay.

Which of the following capital budgeting techniques consider(s)cash flow over the entire life of the project? Internal Rate of Return Payback A) Yes Yes B) Yes No C) No Yes D) No No

Given the following data: Present Investment Required \ 12,000 Net Present Value \ 430 Annual cost Savings \ ? Discount Rate 12\% Life of the Project 10years Based on the data given,what would be the profitability index? (Ignore income taxes in this problem.)

To determine the effect of income taxes on a project,multiply the net present value of the project by one minus the tax rate.

Managerial Accounting and the Business Environment

Cost Terms,concepts,and Classifications

Cost Behaviour: Analysis and Use

Cost-Volume-Profit Relationships

Systems Design: Job-Order Costing

Systems Design: Process Costing

Activity-Based Costing: A Tool to Aid Decision Making

Variable Costing: A Tool for Management

Budgeting

Standard Costs and Overhead Analysis

Reporting for Control

Relevant Costs for Decision Making

Financial Statement Analysis

Filters