Exam 28: Income Taxes in Capital Budgeting Decisions

Jenny Inc. has provided the following data concerning an investment project that has been proposed: The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 14%. -When computing the net present value of the project,what is the after-tax cash flow from the salvage value in the final year?

Morgado Inc. has provided the following data to be used in evaluating a proposed investment project: The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 19%. -When computing the net present value of the project,what are the annual after-tax cash receipts?

Morgado Inc. has provided the following data to be used in evaluating a proposed investment project: The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 19%. -By how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken?

A company is considering purchasing an asset for $50,000 that would have a useful life of 8 years and would have a salvage value of $5,000.For tax purposes,the entire original cost of the asset would be depreciated over 8 years using the straight-line method and the salvage value would be ignored.The asset would generate annual net cash inflows of $26,000 throughout its useful life.The project would require additional working capital of $8,000,which would be released at the end of the project.The company's tax rate is 40% and its discount rate is 13%. Required: What is the net present value of the asset?

Jenny Inc. has provided the following data concerning an investment project that has been proposed: The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 14%. -The net present value of the project is closest to:

Last year the sales at Summit Company were $400,000 and were all cash sales.The expenses at Summit were $250,000 and were all cash expenses.The tax rate was 40%.The after-tax net cash inflow at Summit last year was:

The reduction in taxes made possible by the annual depreciation deductions equals the depreciation deduction multiplied by the tax rate.

In an equipment selection capital budgeting decision,which of the following will increase the present value of the tax savings from the annual depreciation deductions?

A company anticipates a depreciation deduction of $20,000 in year 3 of a project.The company's tax rate is 30% and its discount rate is 14%.The present value of the annual depreciation deductions resulting from this deduction is closest to:

Consider a machine which costs $115,000 now and which has a useful life of seven years.This machine will require a major overhaul at the end of the fourth year which will cost "X" dollars.If the tax rate is 40%,and if the after-tax cash outflow for this overhaul is $3,600,then the amount of "X" in dollars is:

The after-tax cost of a deductible cash expense is:

Management is considering purchasing an asset for $30,000 that would have a useful life of 5 years and no salvage value.For tax purposes,the entire original cost of the asset would be depreciated over 5 years using the straight-line method.The asset would generate annual net cash inflows of $21,000 throughout its useful life.The project would require additional working capital of $4,000,which would be released at the end of the project.The company's tax rate is 40% and its discount rate is 8%. Required: What is the net present value of the asset?

Not all cash inflows are taxable.

The Dill and Gherkin Law Firm is contemplating the decision to open up a branch office across town.The firm would sign a 5-year lease for a fully furnished office for $24,000 per year.The lease also requires a $30,000 security deposit upon signing.This deposit will be given back at the end of the 5-year lease term.No other amounts will need to be invested.However,additional operating costs are expected to be $65,000 per year for the 5 years.The firm expects to generate an additional $100,000 of revenue per year for the 5 years from the branch office.The firm's after-tax cost of capital is 16% and its tax rate is 30%.The net present value of this investment project is closest to:

Sarafin Inc.is considering a project that would require an initial investment of $693,000 and would have a useful life of 7 years.The annual cash receipts would be $416,000 and the annual cash expenses would be $208,000.The salvage value of the assets used in the project would be $35,000.The company's tax rate is 30%.For tax purposes,the entire initial investment without any reduction for salvage value will be depreciated over 5 years.The company uses a discount rate of 15%. Required: Compute the net present value of the project.

Eisenbeis Inc.has provided the following data concerning a proposed investment project: The company's tax rate is 30%.For tax purposes,the entire initial investment without any reduction for salvage value will be depreciated over 7 years.The company uses a discount rate of 13%. Required: Compute the net present value of the project.