Question 1

Which of the following statements is true?

Accepted Answer

A)  The accounting book value for all assets in a class equals the UCC for that class. 
B)  The CCA claimed does not affect cash outflows. 
C)  The total CCA available over the life of the asset depends on the method of depreciation used. 
D)  Since CCA does not involve a cash expenditure, it can be ignored in capital-budgeting decisions. 
E)  The depreciation method used does not affect cash inflows from operations. 
A)  The accounting book value for all assets in a class equals the UCC for that class. 
B)  The CCA claimed does not affect cash outflows. 
C)  The total CCA available over the life of the asset depends on the method of depreciation used. 
D)  Since CCA does not involve a cash expenditure, it can be ignored in capital-budgeting decisions. 
E)  The depreciation method used does not affect cash inflows from operations.

Question 2

What are the tax savings in year 2 from the investment?

Accepted Answer

A)  $3,500 
B)  $7,000 
C)  $8,000 
D)  $5,040 
E)  $18,400 
A)  $3,500 
B)  $7,000 
C)  $8,000 
D)  $5,040 
E)  $18,400

Question 3

The three factors that generally influence depreciation for tax purposes are: amount allowable for depreciation, allowable life of asset, and allowable methods of depreciation. In Canada, for tax purposes,

Accepted Answer

A)  the amount allowable for CCA is the cost of the asset, and, the allowable life of asset and the amount of salvage value are determined by its Class under the Income Tax Act. 
B)  the amount allowable for CCA is the cost of the asset; the tax-based depreciation rate is determined by the Class of the asset under the Income Tax Act, and neither the estimated life of asset nor the amount of estimated salvage value are relevant in calculating the CCA claim. 
C)  the allowable depreciation for tax purposes (CC
A)  is increased for the first year only. 
D)  depreciable assets are placed in various classes by the Income Tax Act, based on their estimated salvage value. 
E)  in the year of acquisition of new assets into an existing pool the allowable CCA claim is based on 50% of all the assets in the pool. 
A)  the amount allowable for CCA is the cost of the asset, and, the allowable life of asset and the amount of salvage value are determined by its Class under the Income Tax Act. 
B)  the amount allowable for CCA is the cost of the asset; the tax-based depreciation rate is determined by the Class of the asset under the Income Tax Act, and neither the estimated life of asset nor the amount of estimated salvage value are relevant in calculating the CCA claim. 
C)  the allowable depreciation for tax purposes (CC
A)  is increased for the first year only. 
D)  depreciable assets are placed in various classes by the Income Tax Act, based on their estimated salvage value. 
E)  in the year of acquisition of new assets into an existing pool the allowable CCA claim is based on 50% of all the assets in the pool.

Question 4

The strategic planning manager of Sports Discount Stores cannot decide how to project the real costs of opening a new store. He knows the capital investment that will be made but is not sure of the returns. In the retail business he knows there will be inflation most of the time. Both the selling prices and operating costs will increase to some degree. Sports Discount Stores has a required rate of return of 15 percent. It is anticipated that inflation will be 4 percent during the next few years. The company expects a new store to show a growth rate, without inflation, of 10 percent. First year sales are expected to be about $500,000.
Required:
a. What is the nominal rate of return for Sports Discount Stores?
b. What will the sales figure for year three be, assuming the strategic planner uses the real rate approach?
c. What will the sales figure for year three be, assuming the strategic planner uses the nominal rate approach?

Accepted Answer

@#IMG-DLM& b. First year: $500

Question 5

What are the tax savings in year 1 from the investment?

Accepted Answer

A)  $31,500 
B)  $39,900 
C)  $23,940 
D)  $11,970 
E)  $105,000 
A)  $31,500 
B)  $39,900 
C)  $23,940 
D)  $11,970 
E)  $105,000

Question 6

The tax effects are significant in capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Question 7

The Income Tax Act classifies every amortizable asset into one of several classes.

Accepted Answer

A) True 
 B)False

Question 8

When calculating the lost tax shield concerning the terminal disposition of an asset four years from now,

Accepted Answer

A)  the amount calculated by the Tax Shield formula must also be discounted for the four years by the relevant discount factor. 
B)  the discount is already included in the formula. 
C)  we discount the Lost Tax Shield amount by the tax rate. 
D)  we discount the Lost Tax Shield amount by (1 - tax rate). 
E)  we discount the Lost Tax Shield amount by (1 + tax rate). 
A)  the amount calculated by the Tax Shield formula must also be discounted for the four years by the relevant discount factor. 
B)  the discount is already included in the formula. 
C)  we discount the Lost Tax Shield amount by the tax rate. 
D)  we discount the Lost Tax Shield amount by (1 - tax rate). 
E)  we discount the Lost Tax Shield amount by (1 + tax rate).

Question 9

Johnson's Mini Mart is considering the purchase of a new electronic bar code scanner that will keep detailed records of every sale transaction. The scanner is likely to have little effect on operating revenues and expenses. Its acquisition is primarily for increasing management information about sales. The scanner costs $4,600 and would be included in Class 10 for tax purposes. Johnson's accountant has stated that due to the fast write-off of Class 10 assets (30% CCA rate), its real cost is less than $4,600.
Due to technological obsolescence, it would have zero salvage value.
Required:
a. Since the bar code scanner cannot produce a profit or even show short run savings, should it even be evaluated as a capital budgeting expenditure? Explain.
b. Explain whether or not the real cost is less than $4,600.
c. If the company has a 40 percent tax rate and a 10% discount rate, compute the real cost of the bar code scanner. Assume there would be other assets in the class.

Accepted Answer

a. Yes, it represents an expenditure tha

Question 10

Allan Ltd. is considering purchasing a new asset. It has a cost of $435,000, an expected 4 year life and a salvage value of $150,000. The equipment would qualify as a class 10 (30% CCA) asset and Allan has a required rate of return of 13% and an effective tax rate of 36%.
Required:
Assume that this asset is the only asset in the pool. Assuming the asset is disposed of at its estimated salvage value, what is the tax effect on the disposition of the asset? Assume the asset will be disposed of on day 1 of year 5 so the asset is eligible for CCA claims in year 4.

Accepted Answer

The ending UCC must be calculated to det

Question 11

What is the balance in the Class 8 pool after the addition of the new equipment?

Accepted Answer

A)  $350,000 
B)  $410,000 
C)  $450,000 
D)  $430,000 
E)  $460,000 
A)  $350,000 
B)  $410,000 
C)  $450,000 
D)  $430,000 
E)  $460,000

Question 12

The required rate of return is

Accepted Answer

A)  the rate of return that the organization forgoes by investing in a particular project rather than in an alternative project of comparable risk. 
B)  the rate of return required by shareholders. 
C)  the same as the internal rate of return. 
D)  a rate that is set by industry standards. 
E)  the rate the Canada Revenue Agency requires on overdue tax payments. 
A)  the rate of return that the organization forgoes by investing in a particular project rather than in an alternative project of comparable risk. 
B)  the rate of return required by shareholders. 
C)  the same as the internal rate of return. 
D)  a rate that is set by industry standards. 
E)  the rate the Canada Revenue Agency requires on overdue tax payments.

Question 13

The income tax depreciation method referred to as CCA

Accepted Answer

A)  allows a corporation some flexibility in choosing the class an asset is assigned to. 
B)  ignores estimated salvage value. 
C)  only applies to businesses organized as corporations. 
D)  provides an organization some flexibility in choosing a method of amortization. 
E)  allows amortization over the asset's useful life as determined by management. 
A)  allows a corporation some flexibility in choosing the class an asset is assigned to. 
B)  ignores estimated salvage value. 
C)  only applies to businesses organized as corporations. 
D)  provides an organization some flexibility in choosing a method of amortization. 
E)  allows amortization over the asset's useful life as determined by management.

Question 14

What is the net present value of the investment, assuming the required rate of return is 20%? Would the hospital want to purchase the new machine?

Accepted Answer

A)  $6,955; yes 
B)  $(16,955); no 
C)  $(16,955); yes 
D)  $25,350; yes 
E)  $3,045; yes 
A)  $6,955; yes 
B)  $(16,955); no 
C)  $(16,955); yes 
D)  $25,350; yes 
E)  $3,045; yes

Question 15

The nominal approach to incorporating inflation into the net present value method predicts cash inflows in real monetary units and uses a real rate as the required rate of return.

Accepted Answer

A) True 
 B)False

Question 16

The excess present value index is

Accepted Answer

A)  the amount that present value exceeds future value in a decision model divided by the payback period. 
B)  the total present value of future net cash inflows divided by the total present value of the initial investment. 
C)  the total value of future cash flows divided by the number of years of the investment. 
D)  the investment divided by the payback period. 
E)  also called the certainty equivalent approach. 
A)  the amount that present value exceeds future value in a decision model divided by the payback period. 
B)  the total present value of future net cash inflows divided by the total present value of the initial investment. 
C)  the total value of future cash flows divided by the number of years of the investment. 
D)  the investment divided by the payback period. 
E)  also called the certainty equivalent approach.

Question 17

After-tax savings from an operating cash outflow are calculated by multiplying the cash flow by (1 - t), where t = the tax rate.

Accepted Answer

A) True 
 B)False

Question 18

The excess present value index is the total present value of future net cash outflows of a project divided by the total present value of cash inflows.

Accepted Answer

A) True 
 B)False

Question 19

The nominal rate of return considers inflation.

Accepted Answer

A) True 
 B)False

Question 20

The required rate of return 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.

Accepted Answer

A) True 
 B)False

Exam 22: Capital Budgeting: a Closer Look

Which of the following statements is true?

What are the tax savings in year 2 from the investment?

The three factors that generally influence depreciation for tax purposes are: amount allowable for depreciation, allowable life of asset, and allowable methods of depreciation. In Canada, for tax purposes,

What are the tax savings in year 1 from the investment?

The tax effects are significant in capital budgeting decisions.

The Income Tax Act classifies every amortizable asset into one of several classes.

When calculating the lost tax shield concerning the terminal disposition of an asset four years from now,

What is the balance in the Class 8 pool after the addition of the new equipment?

The required rate of return is

The income tax depreciation method referred to as CCA

What is the net present value of the investment, assuming the required rate of return is 20%? Would the hospital want to purchase the new machine?

The nominal approach to incorporating inflation into the net present value method predicts cash inflows in real monetary units and uses a real rate as the required rate of return.

The excess present value index is

After-tax savings from an operating cash outflow are calculated by multiplying the cash flow by (1 - t), where t = the tax rate.

The excess present value index is the total present value of future net cash outflows of a project divided by the total present value of cash inflows.

The nominal rate of return considers inflation.

The required rate of return 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.

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

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