74. A company anticipates a depreciation deduction
of $70,000 in year 4 of a project. The company's tax rate is 30% and its
discount rate is 12%. The present value of the depreciation tax shield
resulting from this deduction is closest to:
A) $31,140
B) $49,000
C) $21,000
D) $13,356
Ans: D AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 14C LO: 8 Level: Medium
Solution:
Depreciation
tax shield = $70,000 × 30% = $21,000
Present value of depreciation shield
= $21,000 × 0.636* = $13,356
*Factor from Present Value of $1
table, 12%, 4 years
75. A
company needs an increase in working capital of $50,000 in a project that will
last 4 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:
A) $15,000
B) $20,723
C) $29,600
D) $35,000
Ans: C AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 14C LO: 8 Level: Medium
Solution:
Present value
of working capital release = $50,000 × 0.592* = $29,600
*Factor from Present Value of $1
table
76. Dunn
Construction, Inc., has a large crane that cost $35,000 when purchased ten
years ago. Depreciation taken to date totals $25,000. The crane can be sold now
for $6,000. Assuming a tax rate of 40%, if the crane is sold the total
after-tax cash inflow for capital budgeting purposes will be:
A) $8,400
B) $12,000
C) $7,600
D) $10,000
Ans: C AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 14C LO: 8 Level: Hard
Solution:
|
|
Sale proceeds.......................................................
|
$ 6,000
|
|
|
Less book value of crane ($35,000 − $25,000)...
|
10,000
|
|
|
Loss on sale of crane...........................................
|
($
4,000)
|
|
|
Cash proceeds from sale......................................
|
$6,000
|
|
|
Add tax benefit of loss ($4,000 × 0.40)...............
|
1,600
|
|
|
Total after-tax cash inflow from sale..................
|
$7,600
|
77. If
an investment of $90,000 made now has annual cash operating inflows of $5,000,
and if the tax rate is 40%, then the after-tax cash operating inflow each year
would be:
A) $2,000
B) $36,000
C) $3,000
D) $54,000
Ans: C AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 14C LO: 8 Level: Easy
Solution:
After-tax cash operating inflow =
$5,000 × (1 – 0.40) = $3,000
78. If
a company's income tax rate is 30% and its annual depreciation deduction is
$80,000, then the annual tax savings from the depreciation tax shield is:
A) $56,000
B) $24,000
C) $80,000
D) $32,000
Ans: B AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 14C LO: 8 Level: Easy
Solution:
Annual tax
savings from depreciation tax shield = $80,000 × 0.30 = $24,000
79. Garfield,
Inc., is considering a ten-year investment project with forecasted cash
revenues of $40,000 per year and forecasted cash expenses of $29,000 per year.
The initial cost of the equipment for the project is $23,000. The salvage value
of the equipment is $9,000 at the end of the ten years of the project. The net
book value of the equipment for tax purposes will be zero at the end of the ten
years. The project requires a working capital investment of $7,000 at its
inception and another working capital infusion of $5,000 at the end of year
five. All of this working capital would be released for use elsewhere at the
end of the project. The company's tax rate is 40%. What is the after-tax net
cash flow in the tenth year of the project?
A) $32,000
B) $24,000
C) $20,000
D) $11,000
Ans: B AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 14C LO: 8 Level: Medium Source: CMA, adapted
Solution:
|
|
Salvage sale proceeds.........
|
$9,000
|
|
|
Less book value..................
|
0
|
|
|
Gain on sale........................
|
$9,000
|
Net after-tax cash flow in year 10:
|
|
Gain on sale [$9,000 × (1 − 0.40)].......................................
|
$ 5,400
|
|
|
Initial working capital..........................................................
|
7,000
|
|
|
5th year working capital........................................................
|
5,000
|
|
|
Net revenue per year [($40,000 − $29,000) × (1 − 0.40)]...
|
6,600
|
|
|
Net after-tax cash flow.........................................................
|
$24,000
|
Use the following to answer
questions 80-81:
The Golden Company is analyzing
projects A, B, and C as possible investment opportunities. Each of these
projects has a useful life of eight years. The following information has been
obtained:
|
|
|
Project
A
|
Project
B
|
Project
C
|
|
|
Initial investment.......................................
|
$250,000
|
$475,000
|
$380,000
|
|
|
Present value of future net cash inflows....
|
$290,000
|
$503,000
|
$422,000
|
|
|
Internal rate of return.................................
|
16%
|
20%
|
18%
|
80. Consider
the following statements:
I. Project A is preferred to Project B according to a net present
value ranking.
II. Project A is preferred to Project B according to an internal
rate of return ranking.
III. Project A is preferred to Project B according to a project
profitability index ranking.
Which is true?
A) Only
I
B) Only
II
C) Only
I and II
D) Only
I and III
Ans: D AACSB: Analytic AICPA BB: Critical
Thinking
ACIPA FN: Decision Making AICPA FN: Reporting LO: 1,2,4 Level: Easy
Solution:
|
|
|
Project
A
|
Project
B
|
Project
C
|
|
|
Initial investment (a).................................
|
$250,000
|
$475,000
|
$380,000
|
|
|
Present value of future net cash inflows....
|
$290,000
|
$503,000
|
$422,000
|
|
|
Net present value (b).................................
|
$40,000
|
$28,000
|
$42,000
|
|
|
Project profitability index (b) ÷ (a)...........
|
0.16
|
0.06
|
0.11
|
|
|
Internal rate of return.................................
|
16%
|
20%
|
18%
|
81. Consider
the following statements:
I. Project A has the highest ranking according to the project
profitability index criterion.
II. Project B has the highest ranking according to the internal rate
of return criterion.
III. Project C has the highest ranking according to the net present
value criterion.
Which is true?
A) Only
II
B) Only
I and III
C) Only
II and III
D) I,
II and III
Ans: D AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2,4 Level: Easy
Solution:
|
|
|
Project
A
|
Project
B
|
Project
C
|
|
|
Initial investment (a).................................
|
$250,000
|
$475,000
|
$380,000
|
|
|
Present value of future net cash inflows....
|
$290,000
|
$503,000
|
$422,000
|
|
|
Net present value (b).................................
|
$40,000
|
$28,000
|
$42,000
|
|
|
Project profitability index (b) ÷ (a)...........
|
0.16
|
0.06
|
0.11
|
|
|
Internal rate of return.................................
|
16%
|
20%
|
18%
|
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