Question 1

In eight years,Lai Sing Company plans to receive $11,000 cash from the sale of a machine that has a $16,000 book value.If the firm is subject to a 30% income tax rate and has a 12% after-tax hurdle rate,the correct discounted net cash flow would be:

Accepted Answer

The answer of In eight years,Lai Sing Company plans to...

Question 2

If a proposal's profitability index is greater than one:

Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. If the PI is greater than one, it indicates that the present value of the future cash flows exceeds the initial investment, which means that the net present value (NPV) is positive. Therefore, option B is correct. Option A is incorrect because a positive PI means a positive NPV. Option C is incorrect because a positive PI indicates that the project generates value in excess of the initial investment. Option D is incorrect because the two measures are related and a positive PI means that the NPV is positive. Option E is incorrect because a positive PI indicates that the proposal is generating value and should be accepted.

Question 3

A new machine is expected to produce a MACRS deduction in three years of $50,000.If the company has a 12% after-tax hurdle rate and is subject to a 30% income tax rate,the correct discounted net cash flow to include in an acquisition analysis would be:

Accepted Answer

The correct discounted net cash flow is $10,680. This is calculated by taking the MACRS deduction of $50,000 and multiplying it by the after-tax hurdle rate of 12%. The result is then multiplied by the present value factor for three years at a 12% discount rate, which is 0.7139. This gives a discounted net cash flow of $10,680.

Question 4

The Modified Accelerated Cost Recovery System (MACRS)assumes that,on average,assets will be placed in service:

Accepted Answer

MACRS assumes that assets will be placed in service halfway through the tax year, which means that the depreciation deduction for the first year will be calculated as if the asset was owned for half a year. This assumption is built into the MACRS tables, which provide the appropriate depreciation rates for assets of different classes based on their useful lives.

Question 5

Raymon Company received $7,000 cash from the sale of a machine that had an $11,000 book value.If the company is subject to a 30% income tax rate,the net cash flow to use in a discounted-cash-flow analysis would be:

Accepted Answer

The answer of Raymon Company received $7,000 cash from the...

Question 6

A machine is expected to produce annual savings in cash operating costs of $400,000 for the next six years.If the company has a 10% after-tax hurdle rate and is subject to a 30% income tax rate,the correct discounted net cash flow would be:

Accepted Answer

First, we need to calculate the present value of the savings using the formula PV=C/(1+r)^t, where PV is the present value, C is the cash operating cost savings per year, r is the after-tax hurdle rate, and t is the time period.

PV = $400,000/(1-0.3)*(1-0.1) * [(1- (1/ (1+0.1)^6 )) / 0.1]

PV = $1,219,400

The discounted net cash flow is the present value of the savings minus the initial investment, which is not given in the question.

Therefore, the correct answer is C.

Question 7

Consider the following statements about the investment in working capital in a capital budgeting analysis:
I.Working capital often increases as the result of higher balances in accounts receivable or inventory necessary to support a project.
II.Working capital increases are sources of cash and should be included in a discounted-cash-flow analysis.
III.The time 0 cash investment in working capital is included in a discounted-cash-flow analysis as a cash outflow.
Which of the above statements is (are)correct?

Accepted Answer

Statement I is correct as investment in working capital is often required to support a project, especially in accounts receivable or inventory. Statement II is also correct as increases in working capital are sources of cash and should be included in the discounted-cash-flow analysis. Statement III is also correct as the initial cash investment in working capital is included in the discounted-cash-flow analysis as a cash outflow at time 0. Therefore, both statements I and III are correct.

Question 8

In 10 years,Helo Company plans to receive $9,000 cash from the sale of a machine that has a $5,000 book value.If the firm is subject to a 30% income tax rate and has an 8% after-tax hurdle rate,the correct discounted net cash flow would be:

Accepted Answer

The net cash flow is the sale price minus the book value, which is $9,000 - $5,000 = $4,000. The tax on the gain ($4,000) is 30%, so the tax is $1,200. The after-tax cash flow is $4,000 - $1,200 = $2,800. Discounting $2,800 at 8% for 10 years gives $2,800 / (1.08^10) = $1,296.40. Adding back the book value of $5,000 discounted gives $5,000 / (1.08^10) = $2,315.00. The total discounted cash flow is $1,296.40 + $2,315.00 = $3,611.40.

Question 9

The net after-tax cash flow of the disposal is:

Accepted Answer

The answer of The net after-tax cash flow of the...

Question 10

A company used the net-present-value method to analyze an investment and found the investment to be very attractive.If the firm used straight-line depreciation and changes to the Modified Accelerated Cost Recovery System (MACRS),the investment's net present value will:

Accepted Answer

Switching to MACRS will increase the depreciation expense in the earlier years, leading to higher tax savings earlier, which increases the present value of these savings and thus increases the net present value of the investment.

Question 11

A company used the net-present-value method to analyze an investment and found the investment to be very attractive.If the firm used Modified Accelerated Cost Recovery System (MACRS)and changes to the straight-line depreciation,the investment's net present value will:

Accepted Answer

Switching from MACRS to straight-line depreciation will decrease the net present value because MACRS allows for higher depreciation expenses in the early years, leading to higher tax savings and cash flows earlier, which are more valuable in present value terms.

Question 12

The loss on disposal would be:

Accepted Answer

The loss on disposal is calculated by subtracting the net book value of the computer ($1,500 - $1,000 = $500) from the amount received from selling it ($0 + $150 = $150). Therefore, the loss on disposal is $500.

Question 13

Wrangler Company is considering a five-year project that requires a typical investment in working capital,in this case,$100,000.Consider the following statements about this situation:
I.Wrangler should include a $100,000 outflow that occurs at time 0 in a discounted-cash-flow analysis.
II.Wrangler should include separate $100,000 outflows in each year of the project's five-year life.
III.Wrangler should include a $100,000 recovery of its working-capital investment in year 5 of a discounted-cash-flow analysis.
Which of the above statements is (are)correct?

Accepted Answer

Statement I is correct as the initial investment in working capital is a cash outflow that should be included in the discounted-cash-flow analysis.
Statement III is correct as the working-capital investment will be fully recovered at the end of the project's five-year life and should be included as a cash inflow in year 5 of the discounted-cash-flow analysis. 
Statement II is incorrect as there is no need for separate $100,000 outflows in each year of the project's life, as the working-capital investment occurs only in year 0.

Question 14

Puck Company received $18,000 cash from the sale of a machine that had a $13,000 book value.If the company is subject to a 30% income tax rate,the net cash flow to use in a discounted-cash-flow analysis would be:

Accepted Answer

The answer of Puck Company received $18,000 cash from the...

Question 15

Julio Company purchased a $200,000 machine that has a four-year life and no salvage value.The company uses straight-line depreciation on all asset acquisitions and is subject to a 30% tax rate.The proper cash flow to show in a discounted-cash-flow analysis as occurring at time 0 would be:

Accepted Answer

The proper cash flow to show in a discounted-cash-flow analysis as occurring at time 0 would be the initial cost of the machine, which is $(200,000). This is because the cost of the machine is a cash outflow and occurs at the beginning of the project.

Question 16

Which of the following tools is sometimes used to rank investment proposals?

Accepted Answer

The profitability index is a commonly used tool to rank investment proposals. It calculates the present value of expected future cash flows divided by the initial investment. The higher the index value, the more favorable the investment.

Question 17

Ruiz Company purchased equipment for $30,000 in December 20x1.The equipment is expected to generate $10,000 per year of additional revenue and incur $2,000 per year of additional cash expenses,beginning in 20x2.Under MACRS,depreciation in 20x2 will be $3,000.If the firm's income tax rate is 40%,the after-tax cash flow in 20x2 would be:

Accepted Answer

The answer of Ruiz Company purchased equipment for $30,000 in...

Question 18

If a company desires to be in compliance with current income tax law and write off the cost of its assets rapidly,the firm would use:

Accepted Answer

The answer of If a company desires to be in...

Question 19

A machine is expected to produce increases in cash operating costs of $200,000 for the next six years.If the company has a 14% after-tax hurdle rate and is subject to a 30% income tax rate,the correct discounted net cash flow would be:

Accepted Answer

1. Calculate the before-tax cash flow:
Increase in cash operating costs per year = $200,000
Before-tax cash flow = -$200,000

2. Calculate the after-tax cash flow:
Income tax rate = 30%
After-tax cash flow = -$200,000 * (1-0.3) = -$140,000

3. Discount the after-tax cash flow:
Discount rate = 14%
Discounted net cash flow = -$140,000 / (1+0.14)^1 + -$140,000 / (1+0.14)^2 + ... + -$140,000 / (1+0.14)^6
= $544,460.34

Therefore, the correct answer is B.

Question 20

A machine was sold in December 20x3 for $9,000.It was purchased in January 20x1 for $15,000,and depreciation of $12,000 was recorded from the date of purchase through the date of disposal.Assuming a 40% income tax rate,the after-tax cash inflow at the time of sale is:

Accepted Answer

The book value of the machine at the time of sale is calculated as:
Book value = Purchase price - Accumulated depreciation
Book value = $15,000 - $12,000
Book value = $3,000

Therefore, the gain on sale is:
Gain on sale = Selling price - Book value
Gain on sale = $9,000 - $3,000
Gain on sale = $6,000

Since the tax rate is 40%, the after-tax cash inflow would be:
After-tax cash inflow = Sale price - Taxes
After-tax cash inflow = $9,000 - (40% x $6,000)
After-tax cash inflow = $9,000 - $2,400
After-tax cash inflow = $6,600

Therefore, the correct answer is B) $6,600.

Quiz 16: Capital Expenditure Decisions