Danville Company is contemplating whether to use MACRS depreciation or straight-line depreciation for a plant asset.The following information is available: $\begin{array}{llll} &\text { MACRS } & \text { Straight-line } & \text { Present Value of } \\ &\text { Depreciation } & \text { Depreciation } & \text { One At } 12 \%\\ \text { Year 1 } & \$ 13,333 & \$ 10,000 & 0.8929 \\ \text { Year 2 } & \$ 17,780 & \$ 10,000 & 0.7972 \\ \text { Year 3 } & \$ 5,924 & \$ 10,000 & 0.7118 \\ \text { Year 4 } & \$ 2,964 & \$ 10,000 & 0,6355 \end{array}$ Assume the tax rate is 40%.Over the four years examined,what is the present value of the difference in tax savings between MACRS depreciation and straight-line depreciation?

A) $722 B) $1,806 C) $2,976 D) $9,178 A) $722 B) $1,806 C) $2,976 D) $9,178

Brown Company is considering the following investment: $\begin{array}{ll} \text { Estimated capital investment } & \$ 220,000 \\ \text { Estimated useful life } & 3 \text { years } \\ \text { Estimated disposal value in } 3 \text { years } & \$ 5,000 \\ \text { Estimated annual savings in cash operating costs(end of year) } & \$ 120,000 \\ \text { Minimum desired rate of return } & 12 \% \\ \text { Present value of ordinary annuity of one, } 3 \text { periods at } 12 \% & 2.4018 \\ \text { Present value of one, } 3 \text { periods at } 12 \% & 0.7118 \end{array}$ Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

A) $68,216 B) $71,775 C) $73,216 D) $145,090 A) $68,216 B) $71,775 C) $73,216 D) $145,090

Bryant Company has obtained the following data about a possible planned investment: $\begin{array}{ll} \text { Cost } & \$ 270,000 \\ \text { Terminal salvage value in } 8 \text { years } & \$ 10,000 \\ \text { Annual cash operating savings for } 8 \text { years (end of year) } & \$ 50,000 \\ \text { Estimated useful life in years } & 8 \\ \text { Minimum desired rate of return } & 10 \% \\ \text { Present value of ordinary annuity of one, } 10 \%, 8 \text { periods } & 5.3349 \\ \text { Present value of one, } 10 \%, 8 \text { periods } & 0.4665 \end{array}$ The company uses straight-line depreciation method for financial reporting.Ignore income taxes.The cash operating savings of $50,000 do not include depreciation expense. Required: A) Compute the net present value of the investment. B) Compute the payback period. C) Compute the accounting rate of return using the initial required investment.

A)($50,000 × 5.3349)+ ($10,000

Arizona Company is considering two investments.The relevant data follows: $\begin{array}{lll}&\text { Project A }&\text { Project B }\\ \text { Cost } & \$ 205,010 & \$ 259,770 \\ \text { Annual cash savings (end of year) } & \$ 50,000 & \$ 60,000 \\ \text { Terminal salvage value } & \$ 0 & \$ 0 \\ \text { Estimated useful life in years } & 5 & 5 \\ \text { Minimum desired rate of return } & 10 \% & 10 \%\\ \text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }\\ \end{array}$ $\begin{array}{lll}&\text { Present Value } & \text { Present Value } \\ &\text { Of } \$ 1 & \text { of Ordinary } \\ &\text { for } 5 \text { periods } & \text { Annuity of } \$1 \\ && \text { for } 5 \text { periods }\\ 5 \% & 0.7835 & 4.3295 \\ 6 \% & 0.7473 & 4.2124 \\ 7 \% & 0.713 & 4.1002 \\ 8 \% & 0.6806 & 3.9927 \\ 10 \% & 0.6209 & 3.7908 \\ 12 \% & 0.5674 & 3.6048 \\ 14 \% & 0.5194 & 3.4331 \end{array}$ Ignore taxes.Using the internal rate of return method,which project should be accepted?

A) Project A only B) Project B only C) Project A and Project B D) neither Project A nor Project B A) Project A only B) Project B only C) Project A and Project B D) neither Project A nor Project B

Keisha Company is considering the following investment: $\begin{array}{ll} \text { Estimated capital investment } & \$ 300,000 \\ \text { Estimated useful life } & 3 \text { years } \\ \text { Estimated disposal value in } 3 \text { years } & \$ 10,000 \\ \text { Estimated annual savings in cash operating costs(end of year) } & \$ 130,000 \\ \text { Minimum desired rate of return } & 12 \% \\ \text { Present value of ordinary annuity of one, } 3 \text { periods at } 12 \% & 2.4018 \\ \text { Present value of one, } 3 \text { periods at } 12 \% & 0.7118 \end{array}$ Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

A) $12,234 B) $19,352 C) $22,234 D) $100,000 A) $12,234 B) $19,352 C) $22,234 D) $100,000

Dolly Madison Company is considering two investments.The relevant data follows: $\begin{array}{lll}&\text { Project A }&\text { Project B }\\ \text { Cost } & \$ 200,000 & \$ 300,000 \\ \text { Annual cash savings(end of year) } & \$ 50,692 & \$ 60,995 \\ \text { Terminal salvage value } & \$ 50,000 & \$ 70,000 \\ \text { Estimated useful life in years } & 5 & 5 \\ \text { Minimum desired rate of return } & 10 \% & 10 \%\\ \text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }\\ \end{array}$ $\begin{array}{lll}&\text { Present Value } & \text { Present Value } \\ &\text { Of } \$ 1 & \text { of Ordinary } \\ &\text { for } 5 \text { periods } & \text { Annuity of } \$1 \\ && \text { for } 5 \text { periods }\\ 5 \% & 0.7835 & 4.3295 \\ 6 \% & 0.7473 & 4.2124 \\ 7 \% & 0.713 & 4.1002 \\ 8 \% & 0.6806 & 3.9927 \\ 10 \% & 0.6209 & 3.7908 \\ 12 \% & 0.5674 & 3.6048 \\ 14 \% & 0.5194 & 3.4331 \end{array}$ Ignoring taxes,the internal rate of return for Project A is approximately ________.

A) 8% B) 10% C) 12% D) 14% A) 8% B) 10% C) 12% D) 14%

Jesse Company has obtained the following data about a possible planned investment: $\begin{array} { l } \text {Cost }&\$300,000 \\ \text {Terminal salva ge value in 10 years }&0 \\ \end{array}$ Annual cash operating savings excluding depreciation $\begin{array}{ll} \text { for } 10 \text { years (end of year) } & \$ 50,000 \\ \text { Estimated useful life in years } & 10 \\ \text { Minimum desired rate of return } & 10 \%\\ \text { Present value of ordinary annuity, } 10 \%, 10 \text { periods }&6.1446\\ \text { Present value of one, } 10 \%, 10 \text { periods }&0.3855\\ \text { income tax rate }&40\% \end{array}$ The company uses the straight-line depreciation method for taxes. Required: A) Compute the net present value of the investment. B) Compute the net present value of the investment if the terminal salvage value is estimated to be $50,000 in 10 years.

A)($50,000 × 6.1446 × 0.60)+ (

Exam 11: Capital Budgeting

Danville Company is contemplating whether to use MACRS depreciation or straight-line depreciation for a plant asset.The following information is available: MACRS Straight-line Present Value of Depreciation Depreciation One At 12\% Year 1 \ 13,333 \ 10,000 0.8929 Year 2 \ 17,780 \ 10,000 0.7972 Year 3 \ 5,924 \ 10,000 0.7118 Year 4 \ 2,964 \ 10,000 0,6355 Assume the tax rate is 40%.Over the four years examined,what is the present value of the difference in tax savings between MACRS depreciation and straight-line depreciation?

(Multiple Choice)

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Question 101

Brown Company is considering the following investment: Estimated capital investment \ 220,000 Estimated useful life 3 years Estimated disposal value in 3 years \ 5,000 Estimated annual savings in cash operating costs(end of year) \ 120,000 Minimum desired rate of return 12\% Present value of ordinary annuity of one, 3 periods at 12\% 2.4018 Present value of one, 3 periods at 12\% 0.7118 Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

(Multiple Choice)

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Question 102

In the absence of taxes,depreciation expense on a long-term asset is a relevant cash flow for the NPV model.

(True/False)

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Question 103

The annual after-tax cash operating inflows of a newly purchased machine are expected to be $60,000.The expected useful life of the machine is 5 years.The after-tax minimum desired rate of return,including an inflation factor,is 25%.The inflation rate is 10% per year.What is the annual after-tax cash operating inflow for year 1 for the machine?

(Multiple Choice)

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Question 104

Bryant Company has obtained the following data about a possible planned investment: Cost \ 270,000 Terminal salvage value in 8 years \ 10,000 Annual cash operating savings for 8 years (end of year) \ 50,000 Estimated useful life in years 8 Minimum desired rate of return 10\% Present value of ordinary annuity of one, 10\%,8 periods 5.3349 Present value of one, 10\%,8 periods 0.4665 The company uses straight-line depreciation method for financial reporting.Ignore income taxes.The cash operating savings of $50,000 do not include depreciation expense. Required: A) Compute the net present value of the investment. B) Compute the payback period. C) Compute the accounting rate of return using the initial required investment.

(Essay)

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Question 105

A machine that costs $180,000 is expected to generate $40,000 in cost savings annually for five years.The terminal value at the end of five years is $10,000.Assume straight-line depreciation is used.Ignore income taxes.What is the payback period?

(Multiple Choice)

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Question 106

Ignoring taxes,the total project approach to investment decisions calculates the difference in the .Ignoring income taxes,the differential approach to investment decisions computes the net present value of the difference in .

(Multiple Choice)

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Question 107

When using the NPV model,it is assumed that we can borrow or lend money at the same interest rate.

(True/False)

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Question 108

Marian Company is considering the purchase of equipment for $400,000.The equipment will have a ten year life with no terminal salvage value.Straight-line depreciation will be used for tax purposes.It is expected that the equipment will generate annual sales of $200,000 for ten years and annual production costs,exclusive of depreciation,of $120,000 for ten years.The tax rate is 40%.The required rate of return is 10%.The present value of one for 10 years at 10% is 0.3855.The present value of an ordinary annuity of one for 10 years at 10% is 6.1446.What is the net present value of the equipment?

(Multiple Choice)

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Question 109

When comparing projects using the total project approach,a manager should choose the project with the ________.

(Multiple Choice)

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Question 110

Daisy Company is considering the purchase of equipment for $400,000.The equipment will have a ten year life with no terminal salvage value.Straight-line depreciation will be used for tax purposes.It is expected that the equipment will generate annual sales of $180,000 and annual production costs,exclusive of depreciation,of $120,000.The tax rate is 40%.What is the net annual after-tax cash flow from the equipment?

(Multiple Choice)

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Question 111

Arizona Company is considering two investments.The relevant data follows: Project A Project B Cost \ 205,010 \ 259,770 Annual cash savings (end of year) \ 50,000 \ 60,000 Terminal salvage value \ 0 \ 0 Estimated useful life in years 5 5 Minimum desired rate of return 10\% 10\% Method of depreciation Straight-line Straight-line Present Value Present Value Of \ 1 of Ordinary for 5 periods Annuity of \1 for 5 periods 5\% 0.7835 4.3295 6\% 0.7473 4.2124 7\% 0.713 4.1002 8\% 0.6806 3.9927 10\% 0.6209 3.7908 12\% 0.5674 3.6048 14\% 0.5194 3.4331 Ignore taxes.Using the internal rate of return method,which project should be accepted?

(Multiple Choice)

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Question 112

Discounted-cash-flow models do not focus on net income.

(True/False)

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Question 113

Keisha Company is considering the following investment: Estimated capital investment \ 300,000 Estimated useful life 3 years Estimated disposal value in 3 years \ 10,000 Estimated annual savings in cash operating costs(end of year) \ 130,000 Minimum desired rate of return 12\% Present value of ordinary annuity of one, 3 periods at 12\% 2.4018 Present value of one, 3 periods at 12\% 0.7118 Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

(Multiple Choice)

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Question 114

The total project approach to investments can be used to compare any number of projects.

(True/False)

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Question 115

Dolly Madison Company is considering two investments.The relevant data follows: Project A Project B Cost \ 200,000 \ 300,000 Annual cash savings(end of year) \ 50,692 \ 60,995 Terminal salvage value \ 50,000 \ 70,000 Estimated useful life in years 5 5 Minimum desired rate of return 10\% 10\% Method of depreciation Straight-line Straight-line Present Value Present Value Of \ 1 of Ordinary for 5 periods Annuity of \1 for 5 periods 5\% 0.7835 4.3295 6\% 0.7473 4.2124 7\% 0.713 4.1002 8\% 0.6806 3.9927 10\% 0.6209 3.7908 12\% 0.5674 3.6048 14\% 0.5194 3.4331 Ignoring taxes,the internal rate of return for Project A is approximately ________.

(Multiple Choice)

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Question 116

Nancy Company pays taxes of 15% on their first $20,000 of pretax income and 40% on any taxable income in excess of $20,000.The current pretax income is $50,000.What is the average tax rate?

(Multiple Choice)

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Question 117

What will happen to the net present value of a project if my predictions of cash flows change? I think the cash flows may be overestimated.What should be done to address this?

(Multiple Choice)

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Question 118

Jesse Company has obtained the following data about a possible planned investment: Cost \3 00,000 Terminal salva ge value in 10 years 0 Annual cash operating savings excluding depreciation for 10 years (end of year) \ 50,000 Estimated useful life in years 10 Minimum desired rate of return 10\% Present value of ordinary annuity, 10\%,10 periods 6.1446 Present value of one, 10\%,10 periods 0.3855 income tax rate 40\% The company uses the straight-line depreciation method for taxes. Required: A) Compute the net present value of the investment. B) Compute the net present value of the investment if the terminal salvage value is estimated to be $50,000 in 10 years.

(Essay)

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Question 119

In the net present value method,the disposal value of a long-term asset at the end of its useful life is considered to be a ________.

(Multiple Choice)

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Question 120

In the absence of taxes,depreciation expense on a long-term asset is a relevant cash flow for the NPV model.

A machine that costs $180,000 is expected to generate $40,000 in cost savings annually for five years.The terminal value at the end of five years is $10,000.Assume straight-line depreciation is used.Ignore income taxes.What is the payback period?

Ignoring taxes,the total project approach to investment decisions calculates the difference in the .Ignoring income taxes,the differential approach to investment decisions computes the net present value of the difference in .

When using the NPV model,it is assumed that we can borrow or lend money at the same interest rate.

When comparing projects using the total project approach,a manager should choose the project with the ________.

Discounted-cash-flow models do not focus on net income.

The total project approach to investments can be used to compare any number of projects.

Nancy Company pays taxes of 15% on their first $20,000 of pretax income and 40% on any taxable income in excess of $20,000.The current pretax income is $50,000.What is the average tax rate?

What will happen to the net present value of a project if my predictions of cash flows change? I think the cash flows may be overestimated.What should be done to address this?

In the net present value method,the disposal value of a long-term asset at the end of its useful life is considered to be a ________.

Managerial Accounting,the Business Organization,and Professional Ethics

Introduction to Cost Behavior and Cost Volume Profit Relationships

Measurement of Cost Behavior

Cost Management Systems and Activity-Based Costing

Relevant Information for Decision Making With a Focus on Pricing Decisions

Relevant Information for Decision Making With a Focus on Operational Decisions

Introduction to Budgets and Preparing the Master Budget

Flexible Budgets and Variance Analysis

Management Control Systems and Responsibility Accounting

Management Control in Decentralized Organizations

Cost Allocation

Accounting for Overhead Costs

Job-Order Costing and Process-Costing Systems

Basic Accounting: Concepts, techniques, and Conventions

Understanding Corporate Annual Reports: Basic Financial Statements

Understanding and Analyzing Consolidated Financial Statements

Filters

Exam 11: Capital Budgeting

In the absence of taxes,depreciation expense on a long-term asset is a relevant cash flow for the NPV model.

A machine that costs $180,000 is expected to generate $40,000 in cost savings annually for five years.The terminal value at the end of five years is $10,000.Assume straight-line depreciation is used.Ignore income taxes.What is the payback period?

Ignoring taxes,the total project approach to investment decisions calculates the difference in the ________.Ignoring income taxes,the differential approach to investment decisions computes the net present value of the difference in ________.

When using the NPV model,it is assumed that we can borrow or lend money at the same interest rate.

When comparing projects using the total project approach,a manager should choose the project with the ________.

Discounted-cash-flow models do not focus on net income.

The total project approach to investments can be used to compare any number of projects.

Nancy Company pays taxes of 15% on their first $20,000 of pretax income and 40% on any taxable income in excess of $20,000.The current pretax income is $50,000.What is the average tax rate?

What will happen to the net present value of a project if my predictions of cash flows change? I think the cash flows may be overestimated.What should be done to address this?

In the net present value method,the disposal value of a long-term asset at the end of its useful life is considered to be a ________.

Managerial Accounting,the Business Organization,and Professional Ethics

Introduction to Cost Behavior and Cost Volume Profit Relationships

Measurement of Cost Behavior

Cost Management Systems and Activity-Based Costing

Relevant Information for Decision Making With a Focus on Pricing Decisions

Relevant Information for Decision Making With a Focus on Operational Decisions

Introduction to Budgets and Preparing the Master Budget

Flexible Budgets and Variance Analysis

Management Control Systems and Responsibility Accounting

Management Control in Decentralized Organizations

Cost Allocation

Accounting for Overhead Costs

Job-Order Costing and Process-Costing Systems

Basic Accounting: Concepts, techniques, and Conventions

Understanding Corporate Annual Reports: Basic Financial Statements

Understanding and Analyzing Consolidated Financial Statements

Filters

Ignoring taxes,the total project approach to investment decisions calculates the difference in the .Ignoring income taxes,the differential approach to investment decisions computes the net present value of the difference in .