Exam 32: Income Taxes in Capital Budgeting Decisions

Wable Inc. has provided the following data to be used in evaluating a proposed investment project: 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 16%. -When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?

Wable Inc. has provided the following data to be used in evaluating a proposed investment project: 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 16%. -The net present value of the project is closest to:

Aardvik Corporation is considering renting a new building at an annual rent of $10,000. At a tax rate of 40%, the after-tax cost of the proposed rent would be:

Uzzle Corporation uses a discount rate of 10% and has a tax rate of 30%. The following cash flows occur in the last year of an 8-year equipment selection investment project: The assumed salvage value was zero when the depreciation deductions were computed for tax purposes. The total after-tax present value of the cash flows above is closest to:

Demirjian Inc. is considering an investment project that would require an initial investment of $290,000 and that would last for 8 years. The annual cash receipts from the project would be $189,000 and the annual cash expenses would be $85,000. The equipment used in the project could be sold at the end of the project for a salvage value of $29,000. The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 7 years without any reduction for salvage value. The company uses a discount rate of 13%. -When computing the net present value of the project, what are the annual after-tax cash receipts?

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 $18,000 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 30% and its discount rate is 14%. Required: What is the net present value of the asset?

A company anticipates a taxable cash receipt of $20,000 in year 4 of a project. The company's tax rate is 30% and its discount rate is 14%. The present value of this future cash flow is closest to:

Bauerkemper Inc. is considering a project that would require an initial investment of $924,000 and would have a useful life of 7 years. The annual cash receipts would be $693,000 and the annual cash expenses would be $347,000. The salvage value of the assets used in the project would be $92,000. 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 17%. Required: Compute the net present value of the project.

If a company operates at a profit, the after-tax cost of a tax-deductible cash expense is determined by multiplying the cash expense by one minus the tax rate.

A company anticipates a taxable cash expense of $50,000 in year 2 of a project. The company's tax rate is 30% and its discount rate is 14%. The present value of this future cash flow is closest to:

Littau 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 7 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 is the after-tax cash flow from the salvage value in the final year?

Wable Inc. has provided the following data to be used in evaluating a proposed investment project: 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 16%. -When computing the net present value of the project, what are the annual after-tax cash receipts?

Suppose a machine that costs $80,000 has a useful life of 10 years. Also suppose that depreciation on the machine is $8,000 for tax purposes in year 4. The tax rate is 40%. The tax savings from the depreciation tax shield in year 4 would be:

A company needs an increase in working capital of $30,000 in a project that will last 2 years. The company's tax rate is 30% and its discount rate is 14%. The present value of the release of the working capital at the end of the project is closest to:

Demirjian Inc. is considering an investment project that would require an initial investment of $290,000 and that would last for 8 years. The annual cash receipts from the project would be $189,000 and the annual cash expenses would be $85,000. The equipment used in the project could be sold at the end of the project for a salvage value of $29,000. The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 7 years without any reduction for salvage value. The company uses a discount rate of 13%. -The net present value of the project is closest to:

In a net present value analysis of an equipment upgrade using a 30% tax rate, what amount of cash savings would have the same present value as a $168,000 depreciation deduction?

An investment of $180,000 made now will yield an annual net after-tax cash operating inflow of $24,000 for each of the next ten years. The tax rate is 40%. The annual net before-tax cash operating inflow is:

Littau 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 7 years without any reduction for salvage value. The company uses a discount rate of 19%. -The net present value of the project is closest to:

Salomone 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 3 years. The company uses a discount rate of 13%. Required: Compute the net present value of the project.

To determine the effect of income taxes on a project, multiply the net present value of the project by one minus the tax rate.