Chapter 13 Appendix C

Chapter 13 Appendix C
Student: ___________________________________________________________________________
1. The reduction in taxes made possible by the annual depreciation deductions equals the depreciation deduction
multiplied by the tax rate.
True False
2. The release of working capital at the end of an investment project is a taxable cash inflow.
True False
3. Not all cash inflows are taxable.

True False
4. When a company invests in equipment, it gets to immediately expense the cost of the equipment on the
company's tax reports.
True False
5. 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. an increase in the cost of capital.
B. an increase in the tax rate.
C. an increase in the salvage value of the equipment.
D. a decrease in the cost of new equipment.
6. Depreciation expense reduces income taxes by an amount equal to:

A. one minus the tax rate times the amount of deprecation.
B. the tax rate times the amount of depreciation.
C. the amount of the depreciation.
D. one minus the amount of depreciation.
7. The after-tax cost of a deductible cash expense is:

A. The amount of the cash expense.
B. The amount of the cash expense times the tax rate.
C. The amount of the cash expense times 1 minus the tax rate.
D. Zero.
8. Last year the sales at Jersey Company were $200,000 and were all cash sales. The expenses at Jersey were
$125,000 and were all cash expenses. The tax rate was 30%. The after-tax net cash inflow at Jersey last year
from these operations was:
A. $37,500
B. $60,000
C. $22,500
D. $52,500
9. A company anticipates a taxable cash receipt 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 this future cash flow is closest to:
A. $17,355
B. $7,438
C. $9,000
D. $21,000
10. 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:
A. $6,000
B. $9,000
C. $2,160
D. $1,440
11. Ring Corporation uses a discount rate of 12% and has a tax rate of 30%. The following cash flows occur in
the third year of an equipment selection investment project:
The total after-tax present value of the cash flows is closest to:
A. $10,152
B. $34,603
C. $60,235
D. $79,459
12. Superstrut is considering replacing an old press that cost $80,000 six years ago with a new one that would
cost $245,000. The old press has a net book value of $15,000 and could be sold for $5,000. The increased
production of the new press would require an investment in additional working capital of $6,000. The
company's tax rate is 40%. Superstrut's net investment now in the project would be:
A. $256,000
B. $242,000
C. $250,000
D. $245,000
13. A company needs an increase in working capital of $10,000 in a project that will last 4 years. The
company's tax rate is 30% and its discount rate is 8%. The present value of the release of the working capital at
the end of the project is closest to:
A. $7,350
B. $3,000
C. $7,000
D. $5,145
14. 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:
A. $(509)
B. $5,206
C. $9,490
D. $14,206
15. A company anticipates a taxable cash expense of $80,000 in year 2 of a project. The company's tax rate is
30% and its discount rate is 10%. The present value of this future cash flow is closest to:
A. $(56,000)
B. $(19,835)
C. $(46,281)
D. $(24,000)
16. Last year the sales at Seidelman Company were $700,000 and were all cash sales. The company's expenses
were $450,000 and were all cash expenses. The tax rate was 35%. The after-tax net cash inflow at Seidelman
last year was:
A. $700,000
B. $250,000
C. $162,500
D. $87,500
17. 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:
A. $150,000
B. $60,000
C. $90,000
D. $400,000
18. Suppose a machine costs $20,000 now, has an expected life of eight years, and will require a $7,000
overhaul at the end of the third year. If the tax rate is 40%, then the after-tax cost of this overhaul would be:
A. $12,000
B. $4,200
C. $8,000
D. $2,800
19. 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:
A. $9,450
B. $14,000
C. $6,000
D. $4,050
Burry 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 11%.
20. When computing the net present value of the project, what are the annual after-tax cash receipts?
A. $338,000
B. $168,900
C. $394,100
D. $67,500
21. When computing the net present value of the project, what are the annual after-tax cash expenses?
A. $235,000
B. $217,000
C. $93,000
D. $403,000
22. By how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is
taken?
A. $45,000
B. $75,000
C. $105,000
D. $32,143
23. 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. $22,500
B. $75,000
C. $52,500
D. $0
24. The net present value of the project is closest to:

A. $250,815
B. $84,495
C. $109,800
D. $276,120
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%.
in the final year?
A. $0
B. $31,500
C. $45,000
D. $13,500

A. $227,071
B. $58,113
C. $241,435
D. $43,749
Michelotti Inc. is considering an investment project that would require an initial investment of $140,000 and
that would last for 7 years. The annual cash receipts from the project would be $105,000 and the annual cash
expenses would be $47,000. The equipment used in the project could be sold at the end of the project for a
salvage value of $7,000. 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 19%.
A. $73,500
B. $77,000
C. $58,000
D. $31,500

A. $11,914
B. $37,601
C. $10,464
D. $34,151
Morgado Inc. has provided the following data to be used in evaluating a proposed investment project:
A. $39,000
B. $13,650
C. $54,600
D. $23,400
A. $12,900
B. $30,100
C. $55,900
D. $30,000
taken?
A. $6,500
B. $15,167
C. $18,200
D. $7,800
in the final year?
A. $9,100
B. $3,900
C. $13,000
D. $0
33. 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%.
Required:
Compute the net present value of the project.
34. 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?
35. 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:
36. 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:
Chapter 13 Appendix C Key
1. The reduction in taxes made possible by the annual depreciation deductions equals the depreciation deduction
multiplied by the tax rate.
TRUE
AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Comprehension
Garrison - Chapter 13 #1
Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis
Level: Medium
2. The release of working capital at the end of an investment project is a taxable cash inflow.
FALSE

Level: Medium
3. Not all cash inflows are taxable.

TRUE

Level: Medium
4. When a company invests in equipment, it gets to immediately expense the cost of the equipment on the
company's tax reports.
FALSE

Blooms: Knowledge
Level: Easy
5. 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. an increase in the cost of capital.
B. an increase in the tax rate.
C. an increase in the salvage value of the equipment.
D. a decrease in the cost of new equipment.

Level: Medium
6. Depreciation expense reduces income taxes by an amount equal to:

A. one minus the tax rate times the amount of deprecation.
B. the tax rate times the amount of depreciation.
C. the amount of the depreciation.
D. one minus the amount of depreciation.

Blooms: Knowledge
Level: Easy
Source: CMA, adapted
7. The after-tax cost of a deductible cash expense is:

A. The amount of the cash expense.
B. The amount of the cash expense times the tax rate.
C. The amount of the cash expense times 1 minus the tax rate.
D. Zero.

Level: Medium
8. Last year the sales at Jersey Company were $200,000 and were all cash sales. The expenses at Jersey were
$125,000 and were all cash expenses. The tax rate was 30%. The after-tax net cash inflow at Jersey last year
from these operations was:
A. $37,500
B. $60,000
C. $22,500
D. $52,500
AACSB: Analytic
Blooms: Application
Level: Easy
9. A company anticipates a taxable cash receipt 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 this future cash flow is closest to:
A. $17,355
B. $7,438
C. $9,000
D. $21,000
The answer without rounding error is $17,355.
AACSB: Analytic
Blooms: Application
Level: Medium
10. 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:
A. $6,000
B. $9,000
C. $2,160
D. $1,440
After-tax cost = (1 - Tax rate) Tax-deductible cash expense
$3,600 = (1 - 0.40) Tax-deductible cash expense
Tax deductible cash expense = $3,600 0.60 = $6,000
AACSB: Analytic
Blooms: Application
Level: Hard
11. Ring Corporation uses a discount rate of 12% and has a tax rate of 30%. The following cash flows occur in
the third year of an equipment selection investment project:
The total after-tax present value of the cash flows is closest to:
A. $10,152
B. $34,603
C. $60,235
D. $79,459
AACSB: Analytic
Blooms: Application
Level: Medium
12. Superstrut is considering replacing an old press that cost $80,000 six years ago with a new one that would
cost $245,000. The old press has a net book value of $15,000 and could be sold for $5,000. The increased
production of the new press would require an investment in additional working capital of $6,000. The
company's tax rate is 40%. Superstrut's net investment now in the project would be:
A. $256,000
B. $242,000
C. $250,000
D. $245,000
AACSB: Analytic
Blooms: Application
Level: Medium
13. A company needs an increase in working capital of $10,000 in a project that will last 4 years. The
company's tax rate is 30% and its discount rate is 8%. The present value of the release of the working capital at
the end of the project is closest to:
A. $7,350
B. $3,000
C. $7,000
D. $5,145
AACSB: Analytic
Blooms: Application
Level: Medium
14. 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:
A. $(509)
B. $5,206
C. $9,490
D. $14,206
AACSB: Analytic
Blooms: Application
Level: Medium
15. A company anticipates a taxable cash expense of $80,000 in year 2 of a project. The company's tax rate is
30% and its discount rate is 10%. The present value of this future cash flow is closest to:
A. $(56,000)
B. $(19,835)
C. $(46,281)
D. $(24,000)
The exact answer without rounding is $(46,281).
AACSB: Analytic
Blooms: Application
Level: Medium
16. Last year the sales at Seidelman Company were $700,000 and were all cash sales. The company's expenses
were $450,000 and were all cash expenses. The tax rate was 35%. The after-tax net cash inflow at Seidelman
last year was:
A. $700,000
B. $250,000
C. $162,500
D. $87,500
AACSB: Analytic
Blooms: Application
Level: Easy
17. 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:
A. $150,000
B. $60,000
C. $90,000
D. $400,000
AACSB: Analytic
Blooms: Application
Level: Easy
18. Suppose a machine costs $20,000 now, has an expected life of eight years, and will require a $7,000
overhaul at the end of the third year. If the tax rate is 40%, then the after-tax cost of this overhaul would be:
A. $12,000
B. $4,200
C. $8,000
D. $2,800
AACSB: Analytic
Blooms: Application
Level: Easy
19. 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:
A. $9,450
B. $14,000
C. $6,000
D. $4,050
AACSB: Analytic
Blooms: Application
Level: Medium
Burry Inc. has provided the following data to be used in evaluating a proposed investment project:
Garrison - Chapter 13
A. $338,000
B. $168,900
C. $394,100
D. $67,500
AACSB: Analytic
Blooms: Application
Level: Medium
A. $235,000
B. $217,000
C. $93,000
D. $403,000
AACSB: Analytic
Blooms: Application
Level: Medium
taken?
A. $45,000
B. $75,000
C. $105,000
D. $32,143
Tax savings from the depreciation tax shield = Tax rate Depreciation deduction
= 0.30 $150,000 = $45,000
AACSB: Analytic
Blooms: Application
Level: Medium
in the final year?
A. $22,500
B. $75,000
C. $52,500
D. $0
AACSB: Analytic
Blooms: Application
Level: Medium

A. $250,815
B. $84,495
C. $109,800
D. $276,120
AACSB: Analytic
Blooms: Application
Level: Medium
Jenny Inc. has provided the following data concerning an investment project that has been proposed:
in the final year?
A. $0
B. $31,500
C. $45,000
D. $13,500
AACSB: Analytic
Blooms: Application
Level: Medium

A. $227,071
B. $58,113
C. $241,435
D. $43,749
AACSB: Analytic
Blooms: Application
Level: Medium
Michelotti Inc. is considering an investment project that would require an initial investment of $140,000 and
that would last for 7 years. The annual cash receipts from the project would be $105,000 and the annual cash
expenses would be $47,000. The equipment used in the project could be sold at the end of the project for a
salvage value of $7,000. 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 19%.
A. $73,500
B. $77,000
C. $58,000
D. $31,500
AACSB: Analytic
Blooms: Application
Level: Medium

A. $11,914
B. $37,601
C. $10,464
D. $34,151
AACSB: Analytic
Blooms: Application
Level: Medium
Morgado Inc. has provided the following data to be used in evaluating a proposed investment project:
A. $39,000
B. $13,650
C. $54,600
D. $23,400
AACSB: Analytic
Blooms: Application
Level: Medium
A. $12,900
B. $30,100
C. $55,900
D. $30,000
AACSB: Analytic
Blooms: Application
Level: Medium
taken?
A. $6,500
B. $15,167
C. $18,200
D. $7,800
AACSB: Analytic
Blooms: Application
Level: Medium
in the final year?
A. $9,100
B. $3,900
C. $13,000
D. $0
AACSB: Analytic
Blooms: Application
Level: Medium
33. 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%.
Required:
AACSB: Analytic
Blooms: Application
Level: Medium
34. 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:
AACSB: Analytic
Blooms: Application
Level: Medium
35. 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:
AACSB: Analytic
Blooms: Application
Level: Medium
36. 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:
AACSB: Analytic
Blooms: Application
Level: Medium
Chapter 13 Appendix C Summary

Category
# of Questions
AACSB: Analytic
29
36
36
Blooms: Application
29
Blooms: Knowledge
40
36
Level: Easy
Level: Hard
Level: Medium
29

Chapter 13 Appendix C

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Chapter 13 Appendix C

Hochgeladen von

Copyright:

Verfügbare Formate

Chapter 13 Appendix C

3. Not all cash inflows are taxable.

6. Depreciation expense reduces income taxes by an amount equal to:

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

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

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

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