Gibboney Inc. has provided the following data to be used in evaluating a proposed investment project:

Gibboney Inc. has provided the following data to be used in evaluating a proposed investment project:

	Initial investment...............	$880,000
	Annual cash receipts..........	$660,000
	Life of the project..............	8 years
	Annual cash expenses........	$330,000
	Salvage value.....................	$88,000
	Tax rate..............................	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 12%.

    119. When computing the net present value of the project, what are the annual after-tax cash receipts?

            A)      $462,000

            B)      $396,000

            C)      $198,000

            D)      $69,300

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  8     Level:  Medium

            Solution:

           

            Annual after-tax cash receipts = Annual cash receipts × (1 − Tax rate)

= $660,000 × (1 − 0.30) = $462,000

    120. When computing the net present value of the project, what are the annual after-tax cash expenses?

            A)      $429,000

            B)      $242,000

            C)      $99,000

            D)      $231,000

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  8     Level:  Medium

            Solution:

           

            Annual after-tax cash expenses = Annual cash expenses × (1 − Tax rate)

= $330,000 × (1 − 0.30)

= $231,000

    121. 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?

            A)      $37,714

            B)      $88,000

            C)      $77,000

            D)      $33,000

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  8     Level:  Medium

            Solution:

           

	Initial investment........................	$880,000
	Life in years................................	7 years
	Annual amount of depreciation..	$125,714

Annual amount of depreciation tax shield = $125,714 × 0.30

= $37,714

    122. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?

            A)      $0

            B)      $88,000

            C)      $26,400

            D)      $61,600

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  8     Level:  Medium

            Solution:

           

	Gain on sale (asset fully depreciated)....	$88,000
	× (1 − Tax rate).......................................	0.70
	After-tax cash flow from salvage value.	$61,600

    123. The net present value of the project is closest to:

            A)      $464,622

            B)      $439,736

            C)      $292,494

            D)      $267,608

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  8     Level:  Medium

            Solution:

           

            Annual after-tax cash receipts = Annual cash receipts × (1 − Tax rate)

= $660,000 × (1 − 0.30) = $462,000

Annual after-tax cash expenses = Annual cash expenses × (1 − Tax rate)

= $330,000 × (1 − 0.30)

= $231,000

	Initial investment........................	$880,000
	Life in years................................	7 years
	Annual amount of depreciation..	$125,714

Annual amount of depreciation tax shield = $125,714 × 0.30

= $37,714

	Year(s)	Amount	12% Factor	PV
Initial investment...............	Now	($880,000)	1.000	($   880,000)
Annual net cash receipts (after-tax).......................................	1-8	$462,000	4.968	2,295,216
Annual net cash expenses (after-tax).......................................	1-8	($231,000)	4.968	(1,147,608)
Salvage value (after-tax)...	8	$61,600	0.404	24,886
Annual depreciation tax shield.......................................	1-7	$37,714	4.564	172,127
Net present value...............				$   464,621

Use the following to answer questions 124-127:

(Appendix 14C) Shufflebarger Inc. has provided the following data to be used in evaluating a proposed investment project:

	Initial investment...............	$280,000
	Annual cash receipts.........	$196,000
	Life of the project..............	6 years
	Annual cash expenses.......	$78,000
	Salvage value....................	$28,000

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 16%.

    124. When computing the net present value of the project, what are the annual after-tax cash receipts?

            A)      $112,000

            B)      $137,200

            C)      $29,400

            D)      $58,800

           

            Ans:  B     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  8     Level:  Medium

            Solution:

           

            Annual after-tax cash receipts = Annual cash receipts × (1 − Tax rate)

= $196,000 × (1 − 0.30) = $137,200

    125. When computing the net present value of the project, what are the annual after-tax cash expenses?

            A)      $101,400

            B)      $50,000

            C)      $54,600

            D)      $23,400

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  8     Level:  Medium

            Solution:

           

            Annual after-tax cash expenses = Annual cash expenses × (1 − Tax rate)

= $78,000 × (1 − 0.30) = $54,600

    126. 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?

            A)      $16,800

            B)      $39,200

            C)      $14,000

            D)      $32,667

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  8     Level:  Medium

            Solution:

           

	Initial investment........................	$280,000
	Life in years................................	5 years
	Annual amount of depreciation..	$56,000

Annual amount of depreciation tax shield = $56,000 × 0.30

= $16,800

    127. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?

            A)      $28,000

            B)      $8,400

            C)      $19,600

            D)      $0

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  8     Level:  Medium

            Solution:

           

	Gain on sale (asset fully depreciated)....	$28,000
	× (1 − Tax rate).......................................	0.70
	After-tax cash flow from salvage value.	$19,600

Use the following to answer questions 128-129:

(Appendix 14C) Valentin Inc. has provided the following data concerning an investment project that has been proposed:

	Initial investment...............	$890,000
	Annual cash receipts..........	$534,000
	Life of the project..............	5 years
	Annual cash expenses........	$267,000
	Salvage value.....................	$45,000

The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 3 years without any reduction for salvage value. The company uses a discount rate of 10%.

    128. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?

            A)      $13,500

            B)      $45,000

            C)      $0

            D)      $31,500

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  8     Level:  Medium

            Solution:

           

	Gain on sale (asset fully depreciated)....	$45,000
	× (1 − Tax rate).......................................	0.70
	After-tax cash flow from salvage value.	$31,500

    129. The net present value of the project is closest to:

            A)      $39,881

            B)      $59,442

            C)      -$181,462

            D)      -$161,901

           

            Ans:  B     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  8     Level:  Medium

            Solution:

           

	Gain on sale (asset fully depreciated)....	$45,000
	× (1 − Tax rate).......................................	0.70
	After-tax cash flow from salvage value.	$31,500

	Initial investment....................................	$890,000
	Depreciable life in years.........................	3 years
	Annual depreciation...............................	$296,667
	× Tax rate...............................................	0.30
	Annual depreciation tax shield...............	$89,000

Annual net cash inflows = Annual cash receipts − Annual cash expenses

= $534,000 − $267,000

= $267,000

After-tax cash inflows = $267,000 × (1 − 0.30)

= $186,900

	Year(s)	Amount	10% Factor	PV
Initial investment...............	Now	($890,000)	1.000	($890,000)
Annual net cash inflows (after-tax).......................	1-5	$186,900	3.791	708,538
Depreciation tax shield......	1-3	$89,000	2.487	221,343
Salvage value (after-tax)...	5	$31,500	0.621	19,562
Net present value...............				$  59,443