Question 1

Jacko Corporation has two projects in which it can invest.Project A has a $500,000 initial cost and will return $700,000 after tax in 4 years.Project B has a $300,000 initial cost and its after-tax returns will be $150,000 in year 1 and $200,000 in year 2.Using a 7 percent discount rate for evaluation,which project(s)should Jacko invest in?

Accepted Answer

Both projects have a positive NPV and therefore should be invested in.

Question 2

CK Corporation can invest $100,000 in a project.After taxes,the project is expected to generate $40,000 of net income the first year and $75,000 of net income the second year.If the company uses a 10 percent discount rate to evaluate projects,what is the project's net cash flow?

Accepted Answer

In order to calculate net cash flow, we need to subtract the initial investment from the total net income generated by the project. So, the net cash flow would be:

Year 1 net income = $40,000
Year 2 net income = $75,000
Total net income = $115,000

Net cash flow = Total net income - Initial investment
Net cash flow = $115,000 - $100,000
Net cash flow = $15,000

However, we need to discount this net cash flow to reflect the time value of money. The formula for calculating discounted cash flow is:

DCF = CF / (1 + r)t

Where:
CF = cash flow
r = discount rate
t = time period

So, in this case:
DCF for year 1 = $40,000 / (1 + 0.1)1 = $36,364.64
DCF for year 2 = $75,000 / (1 + 0.1)2 = $60,983.47

Total DCF = $36,364.64 + $60,983.47 = $97,348.11

Since the DCF is less than the initial investment, the project is not worth investing in. Therefore, the net cash flow would be negative, or ($15,000).

Question 3

Carl is unsure of which rate he should use as a discount rate for project evaluations,7 percent or 10 percent.If he can invest $30,000 in a project that will return $40,000 after-tax in four years,what is the result?

Accepted Answer

Using the Net Present Value (NPV) formula, we can calculate the present value of the $40,000 return for both discount rates. At 7%, the present value is approximately $30,477. At 10%, it's about $27,355. Since Carl is considering investing $30,000, the project's NPV is positive at 7% (making it acceptable) and negative at 10% (leading to rejection).

Question 4

Peanut Co.has 2 projects in which it can invest.Project X has a $300,000 initial cost and will return $600,000 before tax in year 2.Project Y has $600,000 initial cost and will return $1,000,000 before tax in year 4.The company uses an 8 percent discount rate for project evaluation and its marginal tax rate is expected to be 34 percent in all years.Which project(s)should Peanut Co.invest in?
a.Project X
b.Project Y
c.Both projects
d.Neither project

Accepted Answer

The answer of Peanut Co.has 2 projects in which it...

Question 5

What effect does an increased discount rate have on project evaluations?

Accepted Answer

An increased discount rate will increase the present value of future cash flows, therefore decreasing net cash flow. This can lead to a lower net present value and potentially make the project less attractive for investment.

Question 6

The business purpose doctrine:

Accepted Answer

The business purpose doctrine requires that a transaction must have a legitimate, economic purpose beyond merely reducing taxes for it to be considered valid for tax purposes. This doctrine is used to prevent tax evasion through transactions that have no real economic substance other than tax savings.

Question 7

How much tax can be saved if John shifts $2,000 of income to his 18 year old dependent son? John is in the 25 percent tax bracket and his son has no other taxable income in 2013.

Accepted Answer

John can save $500 in taxes by shifting $2,000 of income to his son. Since John is in the 25% tax bracket, he would save 25% of $2,000, which is $500. His son, having no other taxable income, would likely be in a lower tax bracket, potentially paying no tax on this income.

Question 8

A decision in the small case division of the Tax Court can be appealed only to

Accepted Answer

Decisions in the small case division of the Tax Court are final and cannot be appealed to any higher court.

Question 9

Copp Co.can invest in a project that costs $200,000.It is expected to provide a lump sum after-tax return of $300,000.If Copp uses an 8 percent discount rate for evaluation,in what year must it recover the $300,000 to produce a positive net cash flow?

Accepted Answer

The answer of Copp Co.can invest in a project that...

Question 10

James can invest in a project that will cost $70,000.The project is expected to pay him $95,000 after-tax in 5 years.What is the maximum discount rate,as a whole number,that he could use to evaluate the project that would yield a positive cash flow?

Accepted Answer

The answer of James can invest in a project that...

Question 11

The primary source of tax authority that provides explanations,definitions,and examples of tax laws is the

Accepted Answer

The answer of The primary source of tax authority that...

Question 12

Crispen Corporation can invest in a project that costs $400,000.The project is expected to have an after-tax return of $250,000 in each of years 1 and 2.Crispen normally uses a 10 percent discount rate to evaluate projects but feels it should use 12 percent to compensate for inflation.How much difference does the rate make in the after-tax net present value of the project?

Accepted Answer

The difference in the after-tax net present value (NPV) of the project when using a 12% discount rate instead of a 10% discount rate can be calculated by finding the NPV at both rates and then subtracting the two. At a 10% discount rate, the NPV is calculated as follows:NPV = -400,000 + 250,000 / (1 + 0.10)^1 + 250,000 / (1 + 0.10)^2 = -400,000 + 227,272.73 + 206,611.57 = 33,884.30At a 12% discount rate, the NPV is:NPV = -400,000 + 250,000 / (1 + 0.12)^1 + 250,000 / (1 + 0.12)^2 = -400,000 + 223,214.29 + 199,328.93 = 22,543.22The difference in NPV between using a 12% and a 10% discount rate is 33,884.30 - 22,543.22 = 11,341.08, which is closest to $11,250.

Question 13

Merced Company has invested $200,000 in a project.It had before tax net income of $100,000 in year 1,$150,000 in year 2,and $125,000 in year 3.What is the net present value of this project's after-tax net cash flow if Merced's discount rate is 8 percent and its marginal tax rate is 34 percent in all years?

Accepted Answer

The after-tax net income is calculated by reducing the tax from the before-tax income. The cash flows are then discounted at 8% to find the present value. The NPV is the sum of these present values minus the initial investment.

Question 14

How much tax can Charles save if he holds stock on which he has a $30,000 short-term gain until he can use the applicable 15 percent long-term capital gains tax rate? He is in the 25 marginal tax rate for individuals.

Accepted Answer

The short-term gain tax rate for Charles is 25% because he is in the 25% marginal tax bracket for individuals. If Charles holds the stock until he qualifies for the lower long-term capital gains tax rate, he will pay only 15% tax on the gain. Therefore, the tax savings will be:
$30,000 x (25% - 15%) = $3,000
So the correct answer is B, $4,500.

Question 15

Changing which of the following factors as indicated would decrease the after-tax net cash flow of a project:

Accepted Answer

The answer of Changing which of the following factors as...

Question 16

Coral Corporation (a C corporation)sold $100,000 of merchandise for which it paid $40,000.It also paid $35,000 of other expenses.All transactions were in cash.What is Coral Corporation's after-tax net cash inflow?

Accepted Answer

- Revenue = $100,000
- Cost of goods sold = $40,000
- Gross profit = $60,000
- Other expenses = $35,000
- Net profit before tax = $25,000
- Assuming a tax rate of 15%, the tax liability would be $3,750
- Net profit after tax = $21,250
- Since all transactions were in cash, the after-tax net cash inflow would also be $21,250.

Question 17

Which of the following has the least weight of authority when deciding a tax issue?

Accepted Answer

A letter ruling is a response from the IRS to a taxpayer's specific situation, and while it may provide guidance, it does not carry as much weight as a code, committee report or regulation.

Question 18

The Internal Revenue Code is divided into

Accepted Answer

The Internal Revenue Code is organized into subtitles, chapters, subchapters, and sections, which allows for a detailed and hierarchical structure of tax laws in the United States.

Question 19

Changing which of the following factors as indicated would increase the after-tax net cash flow of a project:

Accepted Answer

Delaying expense recognition can increase the after-tax net cash flow of a project because it defers tax liabilities, allowing more cash to be used or invested in the interim.

Question 20

Which of the following committees is not involved in the tax writing process?

Accepted Answer

The Judiciary Committee is not involved in the tax writing process. Tax legislation is primarily the responsibility of the Ways and Means Committee in the House of Representatives and the Senate Finance Committee. The Joint Conference Committee may be involved when reconciling House and Senate versions of tax legislation, but the Judiciary Committee does not play a role in writing tax laws.

Quiz 2: The Tax Practice Environment