Question 1

(Appendix 13B)Last year,a firm had taxable cash receipts of $800,000,and the tax rate was 30%.What was the after-tax net cash inflow from these receipts?
A) $240,000.
B) $560,000.
C) $640,000.
D) $800,000.

Accepted Answer

The after-tax net cash inflow is calculated by subtracting the tax amount from the total taxable cash receipts. The tax amount is $800,000 * 30% = $240,000. Therefore, the after-tax net cash inflow is $800,000 - $240,000 = $560,000.

Question 2

(Appendix 13B)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 capital cost allowance (CCA)deduction 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 income for the year,what would be the tax savings from the CCA tax shield related to this machine for the year of purchase?
A) $0.
B) $3,900.
C) $9,100.
D) $13,000.

Accepted Answer

The tax savings from the CCA tax shield related to this machine for the year of purchase would be calculated as follows: 
CCA tax shield = CCA deduction x Tax rate 
= $13,000 x 30% 
= $3,900 
Therefore, the tax savings would be $3,900. Option B is the correct answer.

Question 3

(Appendix 13B)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%,what would be the after-tax cost of this overhaul?
A) $2,800.
B) $4,200.
C) $8,000.
D) $12,000.

Accepted Answer

The after-tax cost of the overhaul would be the total cost of the overhaul minus the tax savings from the depreciation of the machine. The depreciation cost can be calculated by dividing the initial cost of the machine by its expected life (i.e. $20,000/8 =$2,500 per year).

At the end of the third year, the machine will have been depreciated for a total of $7,500 ($2,500 * 3 years). Therefore, the remaining book value (i.e. the value of the machine for tax purposes) will be $20,000 - $7,500 = $12,500.

The tax savings from the depreciation will be 40% * $7,500 = $3,000. So the after-tax cost of the overhaul will be $7,000 - $3,000 = $4,000.

Therefore, the answer is B) $4,200.

Question 4

(Appendix 13B)At the Bartholomew Company last year,all sales were for cash and all expenses were paid in cash.The tax rate was 30%.If the after-tax net cash inflow from these operations last year was $10,500,and if the total before-tax and tax-deductible cash expenses were $35,000,what must have been the total before-tax cash sales?
A) $45,000.
B) $50,000.
C) $60,000.
D) $65,000.

Accepted Answer

The before-tax net cash inflow can be calculated as follows:

Before-tax net cash inflow = after-tax net cash inflow / (1 - tax rate)

Before-tax net cash inflow = $10,500 / (1 - 0.30)

Before-tax net cash inflow = $15,000

The before-tax cash sales can be calculated as follows:

Before-tax cash sales = before-tax net cash inflow - total before-tax and tax-deductible cash expenses

Before-tax cash sales = $15,000 - $35,000

Before-tax cash sales = -$20,000

Since the before-tax cash sales cannot be negative, this means that there must have been an error in the calculation or the information provided in the question. Therefore, none of the answer choices are correct.

Question 5

(Appendix 13B)A piece of equipment is in Class 7 with a maximum CCA rate of 15%.The income tax rate is 40%.The tax savings from the CCA tax shield on this equipment for the first year was $1,500.What must have been the original capital cost of the equipment?
A) $3,750.
B) $25,000.
C) $33,333.
D) $50,000.

Accepted Answer

The answer of (Appendix 13B)A piece of equipment is in...

Question 6

(Appendix 13A and 13B)A company needs an increase in working capital of $70,000 in a project that will last three years.The company's tax rate is 30%,and its discount rate is 8%.What is the approximate present value of the working capital to be released at the end of the project? (Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )
A) $21,000.
B) $38,898.
C) $49,000.
D) $55,568.

Accepted Answer

The answer of (Appendix 13A and 13B)A company needs an...

Question 7

(Appendix 13B)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%.What would be Superstrut's net investment now in the project?
A) $240,000.
B) $245,000.
C) $246,000.
D) $251,000.

Accepted Answer

The initial cost of the new press is $245,000, and Superstrut can offset this cost by selling the old press for $5,000 and taking the tax benefit from the book value of the old press, which is $6,000 ($80,000 - $15,000) * 0.4 = $6,000. Therefore, the net investment in the new press is $245,000 - $5,000 - $6,000 = $234,000. However, the increased production from the new press would require an additional investment in working capital of $6,000, bringing the total net investment in the project to $234,000 + $6,000 = $240,000. Adding the initial cost of the new press to this investment would give a total project cost of $245,000, which is the same as choice B. However, since the question specifically asks for the net investment in the project, we should choose choice C, which is $1,000 higher due to the additional working capital investment.

Question 8

(Appendix 13B)Consider a machine that costs $115,000 now and has a useful life of seven years.This machine will require a major overhaul at the end of the fourth year that will cost X dollars.If the tax rate is 40%,and if the after-tax cash outflow for this overhaul is $3,600,what is the amount of X in dollars?
A) $1,440.
B) $2,160.
C) $6,000.
D) $9,000.

Accepted Answer

To calculate the cost of the overhaul, we need to determine the after-tax cost of the overhaul. 
After-tax cost of overhaul = before-tax cost of overhaul - tax savings 
Tax savings = tax rate * before-tax cost of overhaul 
Tax savings = 0.4 * X

Given that after-tax cash outflow for this overhaul is $3,600, we can write:

Before-tax cost of overhaul - tax savings = $3,600 
X - 0.4X = $3,600 
0.6X = $3,600 
X = $6,000

Therefore, the cost of the overhaul is $6,000. Option C is the correct answer.

Question 9

(Appendix 13A and 13B)A company needs an increase in working capital of $20,000 in a project that will last four years.The company's tax rate is 30%,and its discount rate is 10%.What is the approximate present value of the working capital to be released at the end of the project? (Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )
A) $6,000.
B) $9,562.
C) $13,660.
D) $14,000.

Accepted Answer

The answer of (Appendix 13A and 13B)A company needs an...

Question 10

(Appendix 13A and 13B)A company anticipates a capital cost allowance (CCA)deduction of $70,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 14%.What is the approximate present value of the CCA tax shield resulting from this deduction? (Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )
A) $16,159.
B) $21,000.
C) $37,704.
D) $49,000.

Accepted Answer

The answer of (Appendix 13A and 13B)A company anticipates a...

Question 11

(Appendix 13A and 13B)A company anticipates a capital cost allowance (CCA)deduction of $30,000 in year 3 of a project.The company's tax rate is 30%,and its discount rate is 12%.What is the approximate present value of the CCA tax shield resulting from this deduction? (Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )
A) $6,406.
B) $9,000.
C) $14,947.
D) $21,000.

Accepted Answer

The answer of (Appendix 13A and 13B)A company anticipates a...

Question 12

(Appendix 13B)Last year,the sales at Seidelman Company were $700,000 and were all cash sales.The company's tax-deductible expenses were $450,000 and were all cash expenses.The tax rate was 35%.What was the after-tax net cash inflow at Seidelman last year?
A) $87,500.
B) $162,500.
C) $250,000.
D) $700,000.

Accepted Answer

The taxable income would be $700,000 - $450,000 = $250,000. The tax due would be 35% * $250,000 = $87,500. Therefore, the after-tax net cash inflow would be $700,000 - $87,500 = $612,500. Since the question asks for after-tax net cash inflow and all sales and expenses were in cash, this would be the final answer.

Question 13

(Appendix 13A and 13B)A company anticipates a tax-deductible cash expense of $60,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 14%.What is the approximate present value of this future cash outflow? Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )
A) $42,000.
B) $32,318.
C) $18,000.
D) $38,473.

Accepted Answer

To calculate the present value of the tax-deductible cash expense, we can use the formula PV = FV / (1 + r)^t, where PV is the present value, FV is the future value, r is the discount rate, and t is the number of years. Substituting the given values, we get PV = 60,000/(1+0.14)^2 = $32,318. Therefore, the answer is B.

Question 14

(Appendix 13A and 13B)A company anticipates a tax-deductible cash expense of $40,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 10%.What is the approximate present value of this future cash outflow? Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )
A) $28,000.
B) $23,140.
C) $12,000.
D) $9,917.

Accepted Answer

The present value of the tax-deductible cash expense can be calculated as follows:

PV = Tax-deductible cash expense / (1 + discount rate) ^ number of years

Given: 
Tax-deductible cash expense = $40,000 in year 2 
Discount rate = 10% 
Number of years = 2

PV = 40,000 / (1 + 0.1) ^ 2 
PV = $23,140 (rounded to the nearest dollar)

Therefore, the present value of the tax-deductible cash expense is approximately $23,140.

Question 15

(Appendix 13A and 13B)A company needs an increase in working capital of $50,000 in a project that will last four years.The company's tax rate is 30%,and its discount rate is 8%.What is the approximate present value of the working capital to be released at the end of the project (Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )?
A) $15,000.
B) $25,726.
C) $35,000.
D) $36,751.

Accepted Answer

The present value (PV) of the working capital to be released at the end of the project can be calculated using the formula for the present value of a single sum: PV = FV / (1 + r)^n, where FV is the future value ($50,000), r is the discount rate (0.08), and n is the number of periods (4 years). Plugging in the values: PV = $50,000 / (1 + 0.08)^4 = $50,000 / 1.36049 = $36,751 (rounded to the nearest whole dollar).

Question 16

(Appendix 13B)Suppose a machine that costs $80,000 has a useful life of ten years.Also suppose that capital cost allowance (CCA)deduction on the machine is $8,000 in year 4.The tax rate is 40%.What would be the tax savings from the CCA tax shield in year 4?
A) $4,800 outflow.
B) $3,200 outflow.
C) $3,200 inflow.
D) $4,800 inflow.

Accepted Answer

The tax savings from the CCA tax shield can be calculated as:
Tax savings = CCA deduction x tax rate
Tax savings = $8,000 x 0.4 = $3,200 inflow.

Question 17

(Appendix 13A and 13B)A company anticipates a capital cost allowance (CCA)deduction of $20,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 12%.What is the approximate present value of the CCA tax shield resulting from this deduction? (Do not round your intermediate calculations and round the final answer to the nearest whole dollar. )
A) $4,783.
B) $6,000.
C) $11,161.
D) $14,000.

Accepted Answer

The answer of (Appendix 13A and 13B)A company anticipates a...

Question 18

(Appendix 13B)Last year,the sales at Jersey Company were $200,000 and were all cash sales.The tax-deductible expenses at Jersey were $125,000 and were all cash expenses.The tax rate was 30%.What was the after-tax net cash inflow at Jersey last year from these operations?
A) $22,500.
B) $37,500.
C) $52,500.
D) $60,000.

Accepted Answer

The calculation for after-tax net cash inflow is: 
Net Sales - Tax-Deductible Expenses x (1 - Tax Rate) 
$200,000 - $125,000 x (1 - 0.30) = $200,000 - $87,500 = $112,500 
Therefore, the after-tax net cash inflow at Jersey last year from these operations was $52,500 ($112,500 x 0.30).

Question 19

(Appendix 13B)The capital cost allowance (CCA)tax shield of a Class 7 asset with a maximum 15% CCA rate was $12,000 for Year 2.The income tax rate was 40%.What was the total CCA deduction for the asset for Year 2?
A) $12,000.
B) $20,000.
C) $30,000.
D) $80,000.

Accepted Answer

The answer of (Appendix 13B)The capital cost allowance (CCA)tax shield...

Question 20

(Appendix 13B)A company had tax-deductible cash expenses of $650,000 last year,and the tax rate was 30%.What was the after-tax net cash outflow for these expenses?
A) $195,000.
B) $390,000.
C) $455,000.
D) $650,000.

Accepted Answer

The after-tax net cash outflow would be the amount of cash expenses minus the tax savings. 
Tax savings = cash expenses x tax rate = $650,000 x 0.30 = $195,000 
After-tax net cash outflow = cash expenses - tax savings = $650,000 - $195,000 = $455,000. Therefore, the correct answer is C).

Quiz 13: Capital Budgeting Decisions

(Appendix 13B) Last year,a firm had taxable cash receipts of $800,000,and the tax rate was 30%.What was the after-tax net cash inflow from these receipts?

(Appendix 13B) 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%,what would be the after-tax cost of this overhaul?

(Appendix 13B) A piece of equipment is in Class 7 with a maximum CCA rate of 15%.The income tax rate is 40%.The tax savings from the CCA tax shield on this equipment for the first year was $1,500.What must have been the original capital cost of the equipment?

(Appendix 13B) Last year,the sales at Seidelman Company were $700,000 and were all cash sales.The company's tax-deductible expenses were $450,000 and were all cash expenses.The tax rate was 35%.What was the after-tax net cash inflow at Seidelman last year?

(Appendix 13B) Suppose a machine that costs $80,000 has a useful life of ten years.Also suppose that capital cost allowance (CCA) deduction on the machine is $8,000 in year 4.The tax rate is 40%.What would be the tax savings from the CCA tax shield in year 4?

(Appendix 13B) Last year,the sales at Jersey Company were $200,000 and were all cash sales.The tax-deductible expenses at Jersey were $125,000 and were all cash expenses.The tax rate was 30%.What was the after-tax net cash inflow at Jersey last year from these operations?

(Appendix 13B) The capital cost allowance (CCA) tax shield of a Class 7 asset with a maximum 15% CCA rate was $12,000 for Year 2.The income tax rate was 40%.What was the total CCA deduction for the asset for Year 2?

(Appendix 13B) A company had tax-deductible cash expenses of $650,000 last year,and the tax rate was 30%.What was the after-tax net cash outflow for these expenses?