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 annual amount of the depreciation tax shield? In other words, by how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken?

If a company is operating at a profit, all cash inflows associated with an investment project should be multiplied by one minus the tax rate to be placed on an after-tax basis.

In a plant expansion capital budgeting decision, which of the following amounts would be affected by a change in the tax rate?

Eyring Industries has a truck purchased seven years ago at a cost of $6,000. At the time of purchase, the ultimate salvage value was estimated at $500, but salvage value was ignored in depreciation deductions. The truck is now fully depreciated. Assuming a tax rate of 40%, if the truck is sold for $500, the after-tax cash inflow for capital budgeting purposes will be:

Which of the following would decrease the net present value of a project?

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 $7,000. 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 $18,000 throughout its useful life. The project would require additional working capital of $2,000, which would be released at the end of the project. The company's tax rate is 30% and its discount rate is 15%. Required: What is the net present value of the asset?

Brownell Inc. currently has annual cash revenues of $240,000 and annual expenses of $185,000. The expenses are all cash except for $35,000 of depreciation. The company is considering the purchase of a new mixing machine costing $120,000 that would increase cash revenues to $290,000 and expenses (including depreciation) to $205,000 in year two. The new machine would increase depreciation expense to $50,000 per year. The company's tax rate is 40%. Brownell's incremental after-tax cash flow from the new mixing machine in year two would be:

Last year a firm had taxable cash receipts of $800,000 and the tax rate was 30%. The after-tax net cash inflow from these receipts was:

All of Schnider Company's sales and expenses last year were for cash. The tax rate was 30%. If the net cash inflow (after taxes) last year was $18,900, and if the total gross cash sales were $75,000, then the total cash expenses before taxes must have been:

Kane Company is in the process of purchasing a new machine for its production line. It is near the end of the year, and the machine is being offered at a special discount if purchased before the end of the year. Kane has determined that the depreciation deduction for tax purposes on the new machine for the year of purchase would be $13,000. The tax rate is 30%. If Kane purchases the machine and reports a positive net operating income for the year, then the tax savings from the deprecation tax shield related to this machine for the year of purchase would be:

The calculation of the net present value of an investment project requires that the depreciation tax shield be included at:

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 expenses?

A company anticipates a depreciation deduction of $30,000 in year 2 of a project. The company's tax rate is 30% and its discount rate is 10%. The present value of the depreciation tax shield resulting from this deduction is closest to: