Question 1

Suppose a machine that costs $80,000 has a useful life of 10 years.Also suppose that depreciation on the machine is $8,000 for tax purposes in year 4.The tax rate is 40%.The tax savings from the depreciation tax shield in year 4 would be:

Accepted Answer

The tax savings from the depreciation tax shield in year 4 can be calculated as:

Tax savings = Depreciation x Tax rate
Tax savings = $8,000 x 0.4
Tax savings = $3,200

Since the tax savings are a reduction in taxes payable, this represents an inflow of cash. Therefore, the correct answer is option B, $3,200 inflow.

Question 2

If a company operates at a profit,the after-tax cost of a tax-deductible cash expense is determined by multiplying the cash expense by one minus the tax rate.

Accepted Answer

This statement is true. The after-tax cost of a tax-deductible cash expense is calculated by multiplying the cash expense by one minus the tax rate, as the company can deduct the expense from its taxable income, resulting in a lower tax liability. Therefore, the company's cost for the expense after taxes is reduced by the tax savings.

Question 3

Brownell Inc.currently has annual cash revenues of $240,000 and annual expenses of $185,000.The expenses are all cash except for $35,000 of depreciation.The company is considering the purchase of a new mixing machine costing $120,000 that would increase cash revenues to $290,000 and expenses (including depreciation)to $205,000 in year two.The new machine would increase depreciation expense to $50,000 per year.The company's tax rate is 40%.Brownell's incremental after-tax cash flow from the new mixing machine in year two would be:

Accepted Answer

A

Question 4

The calculation of the net present value of an investment project requires that the depreciation tax shield be included at:

Accepted Answer

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

Question 5

In a plant expansion capital budgeting decision,which of the following amounts would be affected by a change in the tax rate?

Accepted Answer

The answer of In a plant expansion capital budgeting decision,which...

Question 6

Eyring Industries has a truck purchased seven years ago at a cost of $6,000.At the time of purchase,the ultimate salvage value was estimated at $500,but salvage value was ignored in depreciation deductions.The truck is now fully depreciated.Assuming a tax rate of 40%,if the truck is sold for $500,the after-tax cash inflow for capital budgeting purposes will be:

Accepted Answer

The answer of Eyring Industries has a truck purchased seven...

Question 7

Uzzle Corporation uses a discount rate of 10% and has a tax rate of 30%.The following cash flows occur in the last year of an 8-year equipment selection investment project: The assumed salvage value was zero when the depreciation deductions were computed for tax purposes.The total after-tax present value of the cash flows above is closest to:

Accepted Answer

The answer of Uzzle Corporation uses a discount rate of...

Question 8

In a net present value analysis of an equipment upgrade using a 30% tax rate,what amount of cash savings would have the same present value as a $168,000 depreciation deduction?

Accepted Answer

To find the cash savings with the same present value as a $168,000 depreciation deduction, we need to calculate the after-tax cash flow for the depreciation deduction and then find the present value of that cash flow.

The after-tax cash flow for the depreciation deduction is:

$168,000 * 0.3 = $50,400

To find the present value of this cash flow, we can use the formula:

PV = FV / (1 + r)^n

Where PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods.

Assuming a discount rate of 10% and a period of 5 years, we can calculate the present value as:

PV = $50,400 / (1 + 0.1)^5
PV = $31,405.40

Therefore, the amount of cash savings that would have the same present value as a $168,000 depreciation deduction is $31,405.40.

Out of the given answer choices, the closest one is C, $72,000.

Question 9

All of Schnider Company's sales and expenses last year were for cash.The tax rate was 30%.If the net cash inflow (after taxes)last year was $18,900,and if the total gross cash sales were $75,000,then the total cash expenses before taxes must have been:

Accepted Answer

The answer of All of Schnider Company's sales and expenses...

Question 10

Which of the following would decrease the net present value of a project?

Accepted Answer

An increase in the discount rate would increase the present value of future cash flows, resulting in a lower net present value. A decrease in the income tax rate and an increase in the useful life of the project would both increase the net present value. A decrease in the initial investment would also increase the net present value, but it is not a choice in this question.

Question 11

A company needs an increase in working capital of $30,000 in a project that will last 2 years.The company's tax rate is 30% and its discount rate is 14%.The present value of the release of the working capital at the end of the project is closest to:

Accepted Answer

The answer of A company needs an increase in working...

Question 12

A company anticipates a depreciation deduction 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 the depreciation tax shield resulting from this deduction is closest to:

Accepted Answer

The answer of A company anticipates a depreciation deduction of...

Question 13

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 depreciation deduction for tax purposes 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 operating income for the year,then the tax savings from the deprecation tax shield related to this machine for the year of purchase would be:

Accepted Answer

The answer of Kane Company is in the process of...

Question 14

A company anticipates a taxable cash expense of $50,000 in year 2 of a project.The company's tax rate is 30% and its discount rate is 14%.The present value of this future cash flow is closest to:

Accepted Answer

To calculate the present value of the future cash flow of $50,000 in year 2, we need to use the formula:

PV = FV / (1 + r)^n

Where PV is the present value, FV is the future value, r is the discount rate and n is the number of periods.

In this case, FV = $50,000, r = 14%, n = 1 year (since the cash flow occurs in year 2), and the tax rate is 30%.

The after-tax cash flow in year 2 will be $50,000 x (1 - 0.30) = $35,000.

Using the formula, we get:

PV = $35,000 / (1 + 0.14)^1 = $30,701

However, this is the present value before taxes. To get the present value after taxes, we need to divide by (1 - 0.30) = 0.7, which gives us:

PV = $30,701 / 0.7 = $43,858

Therefore, the present value of the future cash flow of $50,000 after taxes is $43,858.

However, the question asks for the present value before taxes. To get this, we need to multiply the after-tax present value by (1 - 0.30) = 0.7, which gives us:

PV = $43,858 x 0.7 = $30,701

Therefore, the present value of the future cash flow of $50,000 before taxes is $30,701. Since none of the answer choices is exactly equal to this value, the closest answer is A) $(26,931).

Question 15

An investment of $180,000 made now will yield an annual net after-tax cash operating inflow of $24,000 for each of the next ten years.The tax rate is 40%.The annual net before-tax cash operating inflow is:

Accepted Answer

To find the before-tax cash operating inflow, we need to add back the tax savings from the net after-tax cash operating inflow.

Tax savings = (tax rate) x (net after-tax cash operating inflow)

= 0.4 x $24,000

= $9,600

Before-tax cash operating inflow = net after-tax cash operating inflow + tax savings

= $24,000 + $9,600

= $33,600

Therefore, the annual net before-tax cash operating inflow is $33,600, which is option D.

Question 16

Aardvik Corporation is considering renting a new building at an annual rent of $10,000.At a tax rate of 40%,the after-tax cost of the proposed rent would be:

Accepted Answer

The after-tax cost of the proposed rent can be calculated as:
After-tax cost = Annual rent * (1 - Tax rate)
After-tax cost = $10,000 * (1 - 0.4)
After-tax cost = $10,000 * 0.6
After-tax cost = $6,000
Therefore, the after-tax cost of the proposed rent would be $6,000. The best choice would be B.

Question 17

To determine the effect of income taxes on a project,multiply the net present value of the project by one minus the tax rate.

Accepted Answer

The answer of To determine the effect of income taxes...

Question 18

Last year a firm had taxable cash receipts of $800,000 and the tax rate was 30%.The after-tax net cash inflow from these receipts was:

Accepted Answer

The answer of Last year a firm had taxable cash...

Question 19

If a company is operating at a profit,all cash inflows associated with an investment project should be multiplied by one minus the tax rate to be placed on an after-tax basis.

Accepted Answer

The answer of If a company is operating at a...

Question 20

A company anticipates a taxable cash receipt of $20,000 in year 4 of a project.The company's tax rate is 30% and its discount rate is 14%.The present value of this future cash flow is closest to:

Accepted Answer

First, we need to find the present value of the future cash receipt. Using the formula for present value of a single cash flow:

PV = CF / (1 + r)^n

Where CF is the cash flow, r is the discount rate, and n is the number of periods.

PV = 20,000 / (1 + 0.14)^4 = 8,289.04

Next, we need to calculate the tax impact on this cash flow. Using the tax rate of 30%:

Tax impact = 20,000 * 0.3 = 6,000

Subtracting the tax impact from the present value:

PV after tax = 8,289.04 - 6,000 = 2,289.04

Therefore, the answer is D) $8,289.

Quiz 14: Income Taxes in Capital Budgeting Decisions