The following data pertain to an investment in equipment: $\begin{array}{|l|r|} \hline \text { Investment in the Project } & \$ 10,000 \\ \hline \text { Net Annual Cash Inflows } & \$ 2,400 \\ \hline \text { Working Capital Required } & \$ 5,000 \\ \hline \text { Salvage Value of the Equipment } & \$ 1,000 \\ \hline \end{array}$ \[\begin{array} {| l | l |} \hline \text { Life of the Project } & \text { 8years } \\ \hline \end{array}\] At the completion of the project,the working capital will be released for use elsewhere.What is the net present value of the project,using a discount rate of 10%? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

A) $603. B) $126. C) ($1,729). D) ($517). A) $603. B) $126. C) ($1,729). D) ($517).

$\begin{array}{l} \text { Oriental Company has gathered the following data on a proposed investment project: }\\ \begin{array} { | l | r | } \hline \text { Investement in Depreciable Equipment } & \$ 200,000 \\ \hline \end{array} \end{array}$ $\begin{array}{|l|r|} \hline \text { Annual Net Cash Flows } & \$ 50,000 \\ \hline \text { Life of the Equipment } & 10 \text { years } \\ \hline \text { Salvage Value } & -0- \\ \hline \text { Discount Rate } & 10 \%\\\hline \end{array}$ 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?

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

Ursus,Inc.is considering a project that would have a ten-year life and would require a $2,000,000 investment in equipment.At the end of ten years,the project would terminate and the equipment would have no salvage value.The project would provide net income each year as follows: $\begin{array}{|l|r|} \hline \text { Sales } & \$ 2,000,000 \\ \hline \text { Less: Variable Expenses } & \$ 1,400,000 \\ \hline \text { Contribution Margin } & \$ 600,000 \\ \hline \text { Less: Fixed Expenses } & \$ 400,000 \\ \hline \text { Net Income } & \$ 200,000 \\ \hline \end{array}$ \[\begin{array} { | l | l |} \hline\quad\quad\quad\quad\quad & \quad\quad\quad\\\hline \end{array}\] All of the above items,except for depreciation of $200,000 a year,represent cash flows.The depreciation is included in the fixed expenses.The company's required rate of return is 12%.(Ignore income taxes in this problem.) Required: a)What is the project's net present value? b)What is the project's internal rate of return? c)What is the project's payback period? d)What is the project's simple rate of return?

a)Because depreciation is the only non-c

Jarvey Company is studying a project that would have a ten-year life and would require a $450,000 investment in equipment that has no salvage value.The project would provide net income each year as follows for the life of the project: $\begin{array}{|l|r|r|} \hline \text { Sales } & & \$ 500,000 \\ \hline \text { Less cash variable expense } & & 200,000 \\ \hline \text { Contribution margin } & & 300,000 \\ \hline \text { Less fixed expenses: } & & \\ \hline \text { Fixed cash expenses } &\$ 150,000 \\ \hline \text { Depreciation expenses } &\underline{45,000} & 195,000 \\ \hline \end{array}$ \[\begin{array} { | l | l | l |} \hline\text { Net incorne } & & \$ 105,000 \\ \hline \end{array}\] The company's required rate of return is 12%.What is the payback period for this project? (Ignore income taxes in this problem.)

A) 2.00 years. B) 3.00 years. C) 4.28 years. D) 9.00 years. A) 2.00 years. B) 3.00 years. C) 4.28 years. D) 9.00 years.

Roy Company is trying to decide whether to invest in one of two projects: X or Z.Associated data for each investment project follow: $\begin{array}{|l|r|r|} \hline & {\text { Project }} \\ \hline & \mathbf{X} & \mathbf{Z} \\ \hline \text { Cost of equipment } & \$ 90,000 & \$ 140,000 \\ \hline \text { Useful life } & 6 \text { years } & 9 \text { years } \\ \hline \text { Annual net cash inflow } & \$ 25,000 & \$ 30,000 \\ \hline \text { Salvage value } & \$ 8,000 & \$ 12,000 \\ \hline \end{array}$ The equipment for each project is in Class 22 with a 30% maximum CCA rate.The income tax rate is 30%.Roy's after-tax cost of capital is 12%. Required: a)Calculate the net present value of each project,and indicate which appears preferable in terms of net present value. b)Calculate the profitability index for each project,and indicate which project would be preferable using this investment criterion.

a)The net present values of the projects

The following information concerns a proposed investment: $\begin{array}{|l|r|} \hline \text { Investment Required } & \$ 14,150 \\ \hline \text { Annual Savings } & \$ 2,500 \\ \hline \end{array}$ \[\begin{array} { | l | l | } \hline \text { Life of the Project } & 12 \text { years } \\ \hline \end{array}\] What is the internal rate of return? (Ignore income taxes in this problem.)

A) 5%. B) 10%. C) 12%. D) 14%. A) 5%. B) 10%. C) 12%. D) 14%.

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: $\begin{array}{|l|r|} \hline \text { Cost of the Special equipment needed now } & \$ 300,00 \\ \hline \text { Working capital needed now } & \$ 80,000 \\ \hline \text { Net annual operating cash inflows } & \$ 120,000 \\ \hline \text { Equipment maintenance overhaul at the End of Four Years } & \$ 20,000 \\ \hline \text { Salvage Value of the Equipment in six Years } & \$ 20,000 \\ \hline \end{array}$ The special equipment is in Class 7 with a maximum $15 \% \mathrm { CCA }$ 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. - Assume the special equipment will have a zero salvage value (instead of $20,000)at the end of six years.The present value of the total tax savings for all years because of the CCA tax shield is closest to which of the following? (Do not round your intermediate calculations.)

A) $56,373. B) $58,258. C) $60,143. D) $62,069. A) $56,373. B) $58,258. C) $60,143. D) $62,069.

$\begin{array}{l} \text { Oriental Company has gathered the following data on a proposed investment project: }\\ \begin{array} { | l | r | } \hline \text { Investement in Depreciable Equipment } & \$ 200,000 \\ \hline \end{array} \end{array}$ $\begin{array}{|l|r|} \hline \text { Annual Net Cash Flows } & \$ 50,000 \\ \hline \text { Life of the Equipment } & 10 \text { years } \\ \hline \text { Salvage Value } & -0- \\ \hline \text { Discount Rate } & 10 \%\\\hline \end{array}$ The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.) -What would be the payback period for the investment?

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.

Exam 13: Capital Budgeting Decisions

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 were the tax savings from the CCA tax shield for Year 1?

(Multiple Choice)

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Question 161

A company anticipates a capital cost allowance (CCA)deduction of $20,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 12%.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.)

(Multiple Choice)

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Question 162

The following data pertain to an investment in equipment: Investment in the Project \ 10,000 Net Annual Cash Inflows \ 2,400 Working Capital Required \ 5,000 Salvage Value of the Equipment \ 1,000 Life of the Project 8years At the completion of the project,the working capital will be released for use elsewhere.What is the net present value of the project,using a discount rate of 10%? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

(Multiple Choice)

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Question 163

Oriental Company has gathered the following data on a proposed investment project: Investement in Depreciable Equipment \ 200,000 Annual Net Cash Flows \ 50,000 Life of the Equipment 10 years Salvage Value -0- Discount Rate 10\% 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?

(Multiple Choice)

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Question 164

Alpine Company is analyzing two investment projects: $\mathrm { P }$ and $\mathrm { Q }$ . The following data are available: Project P Project Q Investment in Computer Equipment now \ 140,000 \ 0 Investment in Working Capital Now \ 0 \ 90,000 Net Annual Operating Cash inflows \ 20,000 \ 16,000 Life of Project 8 years 8 years The computer equipment for Project P will have a total salvage value of $8,000 at end of eight years. It will belong to Class 10 with a 30% maximum CCA rate. At the end of eight years, the working capital for Project Q will be released for use elsewhere. The income tax rate is 30% and Alpine's after-tax cost of capital is 10%. - What is the approximate present value of the tax savings (for all years)due to the CCA tax shield for Project P? (Do not round your intermediate calculations and round your final answer to the nearest whole number.)

(Multiple Choice)

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Question 165

Ursus,Inc.is considering a project that would have a ten-year life and would require a $2,000,000 investment in equipment.At the end of ten years,the project would terminate and the equipment would have no salvage value.The project would provide net income each year as follows: Sales \ 2,000,000 Less: Variable Expenses \ 1,400,000 Contribution Margin \ 600,000 Less: Fixed Expenses \ 400,000 Net Income \ 200,000 All of the above items,except for depreciation of $200,000 a year,represent cash flows.The depreciation is included in the fixed expenses.The company's required rate of return is 12%.(Ignore income taxes in this problem.) Required: a)What is the project's net present value? b)What is the project's internal rate of return? c)What is the project's payback period? d)What is the project's simple rate of return?

(Essay)

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Question 166

Manti Company purchased a new machine on January 2, Year 1. Cost and other data relating to the machine follow: Cost of Machine \ 140,000 Salvage Value \ 20,000 Useful Life 12 years 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 1?(Do not round your intermediate calculations.)

(Multiple Choice)

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Question 167

The Regulations that accompany the Canadian Income Tax Act require that capital cost allowance (CCA)be calculated generally on a declining balance of each single depreciable asset.

(True/False)

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Question 168

Jarvey Company is studying a project that would have a ten-year life and would require a $450,000 investment in equipment that has no salvage value.The project would provide net income each year as follows for the life of the project: Sales \ 500,000 Less cash variable expense 200,000 Contribution margin 300,000 Less fixed expenses: Fixed cash expenses \ 150,000 Depreciation expenses 195,000 Net incorne \ 105,000 The company's required rate of return is 12%.What is the payback period for this project? (Ignore income taxes in this problem.)

(Multiple Choice)

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Question 169

Roy Company is trying to decide whether to invest in one of two projects: X or Z.Associated data for each investment project follow: Project Cost of equipment \ 90,000 \ 140,000 Useful life 6 years 9 years Annual net cash inflow \ 25,000 \ 30,000 Salvage value \ 8,000 \ 12,000 The equipment for each project is in Class 22 with a 30% maximum CCA rate.The income tax rate is 30%.Roy's after-tax cost of capital is 12%. Required: a)Calculate the net present value of each project,and indicate which appears preferable in terms of net present value. b)Calculate the profitability index for each project,and indicate which project would be preferable using this investment criterion.

(Essay)

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Question 170

The following information concerns a proposed investment: Investment Required \ 14,150 Annual Savings \ 2,500 Life of the Project 12 years What is the internal rate of return? (Ignore income taxes in this problem.)

(Multiple Choice)

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Question 171

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 will be able to deduct for tax purposes for Year 2?

(Multiple Choice)

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Question 172

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

(Multiple Choice)

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Question 173

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: Cost of the Special equipment needed now \ 300,00 Working capital needed now \ 80,000 Net annual operating cash inflows \ 120,000 Equipment maintenance overhaul at the End of Four Years \ 20,000 Salvage Value of the Equipment in six Years \ 20,000 The special equipment is in Class 7 with a maximum $15 \% \mathrm { CCA }$ 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. - Assume the special equipment will have a zero salvage value (instead of $20,000)at the end of six years.The present value of the total tax savings for all years because of the CCA tax shield is closest to which of the following? (Do not round your intermediate calculations.)

(Multiple Choice)

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Question 174

Last year,a firm had taxable cash receipts of $800,000,and the tax rate was 30%.What was the after-tax net cash inflow from these receipts?

(Multiple Choice)

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Question 175

Hilltop Company plans to invest $100,000 in a two-year project.The cash flow will be $40,000 for the first year and $80,000 in year 2.At a required rate of return of 12% what is the Net Present Value of the project? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

(Multiple Choice)

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Question 176

A company with $800,000 in operating assets is considering the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year.The payback period for this machine in years is closest to which of the following? (Ignore income taxes in this problem.)

(Multiple Choice)

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Question 177

Not all cash inflows are taxable.

(True/False)

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Question 178

Oriental Company has gathered the following data on a proposed investment project: Investement in Depreciable Equipment \ 200,000 Annual Net Cash Flows \ 50,000 Life of the Equipment 10 years Salvage Value -0- Discount Rate 10\% The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.) -What would be the payback period for the investment?

(Multiple Choice)

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Question 179

Some investment projects require that a company expand its working capital to service the greater volume of business that will be generated.Under the net present value method,how should the investment of working capital be treated?

(Multiple Choice)

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Question 180

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 were the tax savings from the CCA tax shield for Year 1?

The Regulations that accompany the Canadian Income Tax Act require that capital cost allowance (CCA)be calculated generally on a declining balance of each single depreciable asset.

The following information concerns a proposed investment: Investment Required \ 14,150 Annual Savings \ 2,500 Life of the Project 12 years What is the internal rate of return? (Ignore income taxes in this problem.)

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

Last year,a firm had taxable cash receipts of $800,000,and the tax rate was 30%.What was the after-tax net cash inflow from these receipts?

A company with $800,000 in operating assets is considering the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year.The payback period for this machine in years is closest to which of the following? (Ignore income taxes in this problem.)

Not all cash inflows are taxable.

Some investment projects require that a company expand its working capital to service the greater volume of business that will be generated.Under the net present value method,how should the investment of working capital be treated?

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

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