Question 1

Which statement is true concerning depreciation?

Accepted Answer

Depreciation is a non-cash expense that can be deducted on a company's tax return, known as a tax deduction. This deduction reduces the taxable income and therefore reduces the amount of tax a company owes, which affects the tax cash flow. Therefore, statement B is true, while A, C, and D are false.

Question 2

For the internal rate of return to rank projects the same way as the net present value rule,which condition must exist?

Accepted Answer

When the cutoff rate used for the internal rate equals the cost of capital, the internal rate of return rule will rank projects the same way as the net present value rule. This is because both rules assume reinvestment at the cost of capital, and therefore the internal rate of return will just be the discount rate that yields a net present value of zero, which is equivalent to the cost of capital. The other conditions listed (B, C, and D) do not affect the relationship between internal rate of return and net present value.

Question 3

A firm will depreciate a computer costing $10,000 over five years using the straight-line methods for financial reporting.For tax purposes,the company will use an accelerated method as follows:

Assuming a tax rate of 40 percent,what is the relevant cash flow for present value analysis associated with the tax savings related to depreciation for Year 2?

Accepted Answer

The answer of A firm will depreciate a computer costing...

Question 4

How would income tax laws affect investment decisions?

Accepted Answer

The answer of How would income tax laws affect investment...

Question 5

Which statement is true concerning depreciation?

Accepted Answer

Depreciation should be considered in cash flow analysis as it represents the decrease in value of the asset over time and affects the company's ability to generate cash. Option A is false as depreciation affects taxable income by reducing it. Option C is false as depreciation is relevant for decision making, especially in capital budgeting. Option D is false as depreciation is affected by income tax laws, such as the Modified Accelerated Cost Recovery System (MACRS) in the United States.

Question 6

When is the only time an investment analysis needs working capital?

Accepted Answer

Working capital is needed when cash sits idle and cannot be used for investment purposes. In all other cases, investment analysis does not require working capital.

Question 7

Which errors will likely have the largest effect on the net present value of changes in assumptions and estimates?

Accepted Answer

Errors in predicting the amounts of future cash flows have the largest effect on the net present value of changes in assumptions and estimates as they directly impact the cash inflows and outflows used in calculating the present value. Errors in predicting the timing of cash flows and the discount rate may also affect the net present value, but their impact is typically less significant compared to errors in predicting future cash flows amounts. Errors in sensitivity analysis represent a methodology for assessing the impact of changes in assumptions and estimates, rather than an error in itself.

Question 8

Which of the following statements is correct regarding capital investments?

Accepted Answer

The answer of Which of the following statements is correct...

Question 9

Which of the following is a likely errors in the calculation of net present value?

Accepted Answer

All three factors (amount of cash flows, timing of cash flows, and discount rate) can potentially be sources of error in the calculation of net present value. It is important to carefully analyze and accurately estimate these variables to obtain reliable net present value calculations.

Question 10

A planned factory expansion project has an estimated initial cost of $500,000.Using a discount rate of 20 percent,the present value of the future cost savings from the expansion is $520,000.To yield exactly the 20 percent time-adjusted rate of return,the actual investment expenditure should not exceed the $500,000 estimate by more than

Accepted Answer

The actual investment expenditure should not exceed the present value of the future cost savings from the expansion, which is $520,000. Therefore, the maximum investment expenditure is $520,000.

To yield exactly the 20 percent time-adjusted rate of return, the net present value (NPV) of the project should be zero. We can calculate the NPV as follows:

NPV = Present value of future cost savings - Initial cost
    = $520,000 - $500,000
    = $20,000

Therefore, the actual investment expenditure should not exceed the initial cost estimate by more than $20,000. Hence, the answer is B.

Question 11

At the end of a five-year life,a company will dispose of an asset and recognize a gain of $6,000.If the company's cost of capital is 15 percent and its tax rate is 30 percent,what is the present value of the future cash flow?

Accepted Answer

The present value of the future cash flow can be calculated using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($6,000), r is the discount rate (15% or 0.15), and n is the number of periods (5 years). The tax impact is not directly relevant to calculating the present value of the future cash flow, as the question asks for the present value of the gain before taxes. Therefore, PV = $6,000 / (1 + 0.15)^5 = $2,087.

Question 12

The steps of the net present value method for making long-term decisions include

Accepted Answer

The answer of The steps of the net present value...

Question 13

The calculation of the net present value of a proposed project does not require estimates of which of the following?

Accepted Answer

The net present value calculation only considers future cash flows and the timing of those cash flows as well as the cost of capital rate. Sunk costs, which are costs that have already been incurred and cannot be recovered, are not relevant to the calculation of the net present value.

Question 14

A not-for-profit company purchased an asset at a cost of $60,000.Annual operating cash flows are expected to be $20,000 each year for 4 years.At the end of the asset life,there will be no residual (salvage)value.Ignore income taxes.What is the net present value if the cost of capital is 10 percent?

Accepted Answer

To calculate the net present value, we need to discount the expected cash flows back to the present using the cost of capital of 10%.

Using the formula for present value of an annuity, we can calculate the present value of the operating cash flows:

PV = C x [1 - (1 + r)^-n] / r
PV = $20,000 x [1 - (1 + 0.1)^-4] / 0.1
PV = $20,000 x 3.169
PV = $63,380

To calculate the net present value, we subtract the initial cost of the asset from the present value of the cash flows:

NPV = PV - cost
NPV = $63,380 - $60,000
NPV = $3,380

Therefore, the correct answer is B, $3,397.

Question 15

Which statement is true concerning depreciation?

Accepted Answer

Depreciation should be considered in the cash flow analysis because it represents the decrease in value of an asset over time, which affects the net cash flow of a business. Additionally, the tax laws that specify the allowable methods for depreciation affect the after-tax cash flow. Therefore, B is the correct choice. Choice A is incorrect because depreciation does affect after-tax cash flow. Choice C is incorrect because income tax laws do affect depreciation. Choice D is incorrect because depreciation is used in both financial and managerial accounting.

Question 16

Which statement is true concerning depreciation?

Accepted Answer

All three statements are correct. Depreciation affects tax cash flow because it is a deductible expense that affects taxable income. It should be considered in cash flow analysis because it is a non-cash expense that affects the value of an asset over time. The allowable methods for depreciation are specified by income tax laws.

Question 17

Which of the following is a useful feature of spreadsheet programs?

Accepted Answer

Spreadsheet programs help the user see the effect on the net present value of changes in assumptions and estimates. This is a useful feature as it allows the user to understand how sensitive the NPV calculation is to changes in key variables, and to make more informed decisions based on this information. Options A, B, and C are not correct as spreadsheet programs do not necessarily reduce errors in predicting cash flows or discount rates; they simply provide a tool for organizing and analyzing data.

Question 18

In which area will analysts likely err when making capital investment decisions?

Accepted Answer

All of the above areas are prone to errors when making capital investment decisions. Predicting or estimating amounts involves forecasting future revenues, costs, and expenses, which are inherently uncertain. The timing of cash flows can be difficult to determine as well since it is heavily dependent on external factors such as market conditions and competition. The discount rate, used to calculate the present value of future cash flows, is also subject to errors since it depends on several variables such as the cost of capital, inflation, and risk. Therefore, analysts should be aware of the potential errors in these areas and use various techniques to mitigate them.

Question 19

In which area will analysts will likely err when making capital investment decisions?

Accepted Answer

Analysts may make errors in any or all of the areas listed. Estimating future cash flows is difficult and uncertain, and even small errors can have a significant impact on the net present value of a project. Timing of cash flows can also be difficult to predict, particularly in industries where market conditions may change quickly or regulatory environments may shift. Finally, selecting an appropriate discount rate is critical to accurately assessing the value of a potential investment, and analysts may have difficulty determining an appropriate rate given the inherent uncertainties of the investment.

Question 20

Which statement is true concerning depreciation charges?

Accepted Answer

Depreciation charges can be deducted from a firm's tax return, reducing taxable income and thus taxes owed.

Quiz 8: Capital Expenditure Decisions

Which statement is true concerning depreciation?

For the internal rate of return to rank projects the same way as the net present value rule,which condition must exist?

How would income tax laws affect investment decisions?

Which statement is true concerning depreciation?

When is the only time an investment analysis needs working capital?

Which errors will likely have the largest effect on the net present value of changes in assumptions and estimates?

Which of the following statements is correct regarding capital investments?

Which of the following is a likely errors in the calculation of net present value?

At the end of a five-year life,a company will dispose of an asset and recognize a gain of $6,000.If the company's cost of capital is 15 percent and its tax rate is 30 percent,what is the present value of the future cash flow?

The steps of the net present value method for making long-term decisions include

The calculation of the net present value of a proposed project does not require estimates of which of the following?

A not-for-profit company purchased an asset at a cost of $60,000.Annual operating cash flows are expected to be $20,000 each year for 4 years.At the end of the asset life,there will be no residual (salvage) value.Ignore income taxes.What is the net present value if the cost of capital is 10 percent?

Which statement is true concerning depreciation?

Which statement is true concerning depreciation?

Which of the following is a useful feature of spreadsheet programs?

In which area will analysts likely err when making capital investment decisions?

In which area will analysts will likely err when making capital investment decisions?

Which statement is true concerning depreciation charges?