Question 1

Companies may vary the required payback in order to reflect different levels of project risk.

Accepted Answer

A) True 
 B)False  True

Question 2

When considering the net cash inflows resulting from a capital-budgeting decision, taxes will

Accepted Answer

A)  reduce the amount of the cash savings by the tax rate. 
B)  increase the amount of the cash savings by the tax rate. 
C)  increase the amount of the cash savings by (1 - tax rate). 
D)  reduce the amount of the cash savings by (1 - tax rate). 
E)  increase the amount of the cash savings by (1 + tax rate). 
A)  reduce the amount of the cash savings by the tax rate. 
B)  increase the amount of the cash savings by the tax rate. 
C)  increase the amount of the cash savings by (1 - tax rate). 
D)  reduce the amount of the cash savings by (1 - tax rate). 
E)  increase the amount of the cash savings by (1 + tax rate). A

Question 3

Discounted cash flow analysis can be applied in a non-profit organization.

Accepted Answer

A) True 
 B)False  True

Question 4

Explain why the term tax shield is used in conjunction with amortization.

Accepted Answer

Amortization tax deductions result in ta

Question 5

The most frequently encountered error when accounting for inflation in capital budgeting is

Accepted Answer

A)  determining the amount of net cash flows after taxes. 
B)  determining the nominal discount rate. 
C)  keeping net cash flows in real terms and using a nominal discount rate. 
D)  keeping net cash flows in nominal terms and using a real discount rate. 
E)  increasing the nominal rate by the inflation rate. 
A)  determining the amount of net cash flows after taxes. 
B)  determining the nominal discount rate. 
C)  keeping net cash flows in real terms and using a nominal discount rate. 
D)  keeping net cash flows in nominal terms and using a real discount rate. 
E)  increasing the nominal rate by the inflation rate.

Question 6

In case of a sale or trade of a capital asset for another capital asset, the net tax book value of the asset can be ignored for capital budgeting purposes.

Accepted Answer

A) True 
 B)False

Question 7

For Years 1 through 6 Better Products Ltd. had annual net income of $20,000, CCA of $40,000 each year, a 40 percent tax rate, a discount rate of 10 percent and annual cash sales of $200,000. The depreciable assets of Better Products belong in several different classes under the Income tax Act, have a salvage value of zero at the end of six years, and were all bought new at the beginning of Year 1. The present value factors, in simplified form, for 10 percent are:
  
-If the appropriate tax rate is 35%, the after-tax effect of a single CCA deduction of $60,000 is

Accepted Answer

A)  $39,000 net after-tax cash outflow. 
B)  $39,000 net after-tax cash inflow. 
C)  $21,000 net after-tax cash outflow. 
D)  $21,000 net after-tax cash inflow. 
E)  $24,000 net after-tax cash inflow. 
A)  $39,000 net after-tax cash outflow. 
B)  $39,000 net after-tax cash inflow. 
C)  $21,000 net after-tax cash outflow. 
D)  $21,000 net after-tax cash inflow. 
E)  $24,000 net after-tax cash inflow.

Question 8

A new machine will cost $720,000. It is in a CCA class pool that uses a declining balance rate of 20%. The company's tax rate is 42% and it requires a 12% rate of return on investments. Calculate the cash savings from the tax shield the first year assuming the savings occur at year end.

Accepted Answer

A)  $60,480.00 
B)  $54,000.00 
C)  $27,000.00 
D)  $30,240.00 
E)  $37,285.71 
A)  $60,480.00 
B)  $54,000.00 
C)  $27,000.00 
D)  $30,240.00 
E)  $37,285.71

Question 9

The required rate of return is a critical variable in discounted cash flow analysis because it

Accepted Answer

A)  measures the risk of the return. 
B)  sets the minimum which management will accept for a capital budgeting decision. 
C)  is the firm's after-tax discount rate. 
D)  is the rate of return that the firm forgoes by investing in a particular project rather than investing in an alternative project of comparable risk. 
E)  equals the accrual accounting rate of return, net of tax. 
A)  measures the risk of the return. 
B)  sets the minimum which management will accept for a capital budgeting decision. 
C)  is the firm's after-tax discount rate. 
D)  is the rate of return that the firm forgoes by investing in a particular project rather than investing in an alternative project of comparable risk. 
E)  equals the accrual accounting rate of return, net of tax.

Question 10

A new machine will cost $1,800,000. It is in a CCA class pool that uses a declining balance rate of 30%. The company's tax rate is 38% and it requires a 9% rate of return on investments. Calculate the cash savings from the tax shield the first year assuming the savings occur at year end.

Accepted Answer

A)  $153,577.98 
B)  $188,256.88 
C)  $167,400.00 
D)  $94,128.44 
E)  $102,600.00 
A)  $153,577.98 
B)  $188,256.88 
C)  $167,400.00 
D)  $94,128.44 
E)  $102,600.00

Question 11

For project Gemini of Space Company the net investment was be $400,000. The net present value of all future net cash inflows was $800,000. The company's tax rate is 40 percent. The profitability index was

Accepted Answer

A)  0.50 
B)  0.83 
C)  1.20 
D)  2.00 
E)  1.60 
A)  0.50 
B)  0.83 
C)  1.20 
D)  2.00 
E)  1.60

Question 12

A decrease in the tax rate will decrease the net present value (NPV) for a given capital budgeting project.

Accepted Answer

A) True 
 B)False

Question 13

The Toronto Deli & Cafeteria adjoins a large university and receives mostly student customers. It recently purchased a new electronic scanner for student debit card purchases at a cost of $20,000. Amortization has been recorded for one year with six more years remaining. The cafeteria owner has just returned from a trade show where several new scanners were on display. One of the new models, which would be appropriate for the cafeteria, has a cost of $30,000. It has a useful life of 10 years. The manufacturer of the new model predicts that it will result in annual savings of 20 percent over the current operating costs.
Required:
a. Since the current machine is only one year old, should the owner even consider replacing it with the new model? Explain.
b. What are the relevant items to be considered from a capital budgeting perspective in replacing the old machine with the new one?
c. Which of the relevant items have related tax effects?

Accepted Answer

a.
The age of the old machine has no rel

Question 14

The excess present value index is also known as the profitability index.

Accepted Answer

A) True 
 B)False

Question 15

The total project approach to capital budgeting

Accepted Answer

A)  calculates the present value of all cash inflows and outflows under each alternative separately. 
B)  calculates the net present value for the incremental cash flows. 
C)  calculates the net present value of cash flows which differ between alternatives. 
D)  uses gross cash flows to determine net present values. 
E)  produces the same answer as the IRR method. 
A)  calculates the present value of all cash inflows and outflows under each alternative separately. 
B)  calculates the net present value for the incremental cash flows. 
C)  calculates the net present value of cash flows which differ between alternatives. 
D)  uses gross cash flows to determine net present values. 
E)  produces the same answer as the IRR method.

Question 16

How is inflation related to capital budgeting? Discuss.

Accepted Answer

The answer of How is inflation related to capital budgeting?...

Question 17

What is the net present value of the investment, assuming the required rate of return is 12%? Would the hospital want to purchase the new machine?

Accepted Answer

A)  $(48,670); no 
B)  $25,715; no 
C)  $48,670; yes 
D)  $83,415; yes 
E)  $3,670; yes 
A)  $(48,670); no 
B)  $25,715; no 
C)  $48,670; yes 
D)  $83,415; yes 
E)  $3,670; yes

Question 18

Jasper Company Ltd. has a payback goal of three years on new equipment acquisitions. Jasper is evaluating new equipment that costs $450,000, will have a CCA rate of 20%, an estimated useful life of 8 years, and a zero terminal disposal price. The company's marginal tax rate is 40%.
Required:
Calculate the amount of after-tax savings in annual cash operating costs that must be generated by the new equipment in order to meet the company's payback goal.

Accepted Answer

@#IMG-DLM& The $76,320 pays back part of the $450,

Question 19

Explain how the profitability index can be used to rank investments and how it might be used in conjunction with NPV analysis.

Accepted Answer

NPV analysis presents a result in a doll

Question 20

What is the CCA claim in year 2 from the investment?

Accepted Answer

A)  $20,349 
B)  $44,100 
C)  $66,300 
D)  $53,550 
E)  $21,000 
A)  $20,349 
B)  $44,100 
C)  $66,300 
D)  $53,550 
E)  $21,000

Exam 22: Capital Budgeting: a Closer Look

Companies may vary the required payback in order to reflect different levels of project risk.

When considering the net cash inflows resulting from a capital-budgeting decision, taxes will

Discounted cash flow analysis can be applied in a non-profit organization.

Explain why the term tax shield is used in conjunction with amortization.

The most frequently encountered error when accounting for inflation in capital budgeting is

In case of a sale or trade of a capital asset for another capital asset, the net tax book value of the asset can be ignored for capital budgeting purposes.

A new machine will cost $720,000. It is in a CCA class pool that uses a declining balance rate of 20%. The company's tax rate is 42% and it requires a 12% rate of return on investments. Calculate the cash savings from the tax shield the first year assuming the savings occur at year end.

The required rate of return is a critical variable in discounted cash flow analysis because it

A new machine will cost $1,800,000. It is in a CCA class pool that uses a declining balance rate of 30%. The company's tax rate is 38% and it requires a 9% rate of return on investments. Calculate the cash savings from the tax shield the first year assuming the savings occur at year end.

For project Gemini of Space Company the net investment was be $400,000. The net present value of all future net cash inflows was $800,000. The company's tax rate is 40 percent. The profitability index was

A decrease in the tax rate will decrease the net present value (NPV) for a given capital budgeting project.

The excess present value index is also known as the profitability index.

The total project approach to capital budgeting

How is inflation related to capital budgeting? Discuss.

What is the net present value of the investment, assuming the required rate of return is 12%? Would the hospital want to purchase the new machine?

Explain how the profitability index can be used to rank investments and how it might be used in conjunction with NPV analysis.

What is the CCA claim in year 2 from the investment?

The Accountants Vital Role in Decision Making

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Management

Master Budget and Responsibility Accounting

Flexible Budgets, Variances, and Management Control: I

Flexible Budgets, Variances, and Management Control: II

Income Effects of Denominator Level on Inventory Valuation

Quantitative Analyses of Cost Functions

Decision Making and Relevant Information

Pricing Decisions, Product Profitability Decisions, and Cost Management

Strategy, Balanced Scorecard, and Profitability Analysis

Period Cost Allocation

Cost Allocation: Joint Products and Byproducts

Revenue and Customer Profitability Analysis

Process Costing

Spoilage, Rework, and Scrap

Cost Management: Quality, Time, and the Theory of Constraints

Inventory Cost Management Strategies

Capital Budgeting: Methods of Investment Analysis

Transfer Pricing and Multinational Management Control Systems

Multinational Performance Measurement and Compensation

Filters