Question :
45)
The income tax amortization method referred to as CCA 45)
______ : 1196196
45)
The income tax amortization method referred to as CCA 45)
______ A)
allows a corporation some flexibility in choosing Class an asset is assigned to. B)
allows amortization over the asset’s useful life as determined by management. C)
ignores estimated salvage value. D)
pertains to non-profit organizations as well as for-profit organizations. E)
provides an organization some flexibility in choosing a method of amortization.
46)
When a depreciable asset is being disposed of and is not being replaced, how is the tax-shield formula changed? 46)
______ A)
no change B)
The formula is not relevant when an asset is disposed of, only when acquired. C)
It depends on the salvage value of the asset. D)
The CCA rate is increased by multiplying it by 1.5. E)
The third component of the formula is omitted.
47)
A project’s net present value is increased if 47)
______ A)
the rate of inflation rises. B)
the CCA rate is decreased. C)
the discount rate is increased. D)
the company’s net income is negative during the life of the project. E)
the CCA rate is increased.
48)
Which of the following are not considered in capital-budgeting? 48)
______ A)
amortization B)
cash flow from current disposal of old machine C)
cash flow from terminal disposal of new machine D)
recurring after-tax operating flows E)
initial machine investment
49)
All of the following are relevant cash flows in capital budgeting EXCEPT 49)
______ A)
after-tax cash flow from future disposal of asset at life’s end. B)
after-tax cash flow from accumulated amortization. C)
initial asset investment of the replacement machine. D)
after-tax cash flow from current disposal of old asset. E)
both C and D
50)
The total project approach to capital budgeting 50)
______ A)
calculates the present value of all cash inflows and outflows under each alternative separately. B)
produces the same answer as the IRR method. C)
calculates the net present value of cash flows which differ between alternatives. D)
uses gross cash flows to determine net present values. E)
calculates the net present value for the incremental cash flows.
51)
The differential approach is often considered superior to the total project approach to capital budgeting 51)
______ A)
because it is faster if analyzing fewer than three alternatives. B)
because it can more easily accommodate multiple investment opportunities. C)
because it is easier to select the components for the model. D)
for all large investment decisions. E)
because it uses only net cash flows instead of gross cash flows.
52)
Assume that in recent years a global economic crisis has produced a very high annual inflation rate of 25 percent. Columbian Coffee has decided to use a nominal rate to determine capital budgeting decisions. Its traditional real rate of return is 10 percent. The company is planning on purchasing a special coffee grinding machine that costs $30,000. It is anticipated the equipment will generate savings in nominal dollars as follows:
Year 1$15,000
Year 215,000
Year 310,000
The anticipated salvage value of the equipment at the end of three years is $5,000. The income tax rate of Columbian Coffee is 40 percent. The company uses straight-line amortization for all equipment for tax purposes. The present value factors, in simplified form, are:
YearPV of $1
PV of annuity of $1
10%25%35%37.5%10%25%35%37.5%
10.910.800.700.680.910.800.700.68
20.830.630.580.541.741.431.281.22
30.750.500.420.402.491.931.701.62
40.680.400.350.323.172.332.051.94
What is the net present value of the investment? 52)
______ A)
$(14,000) B)
$(12,220) C)
$14,000 D)
$12,220 E)
$1,220
Use the information below to answer the following question(s).
A tool and dye company is considering replacing a lathe with a newer model. The company wants to bid on a special contract that will last six years, at which time they will not need the lathe they currently have, nor the newer model if they decide to acquire it now (it will be disposed of and not replaced). Other data are;
Cost of new lathe$100,000
Trade-in allowance on old lathe14,000
Useful life of new lathe6 years
Salvage value of new lathe44,000
Tax rate35%
RRR9%
Annual cash operating costs (new)20,000
Annual cash operating costs (old)45,000
Salvage value of old lathe in 6 years3,000
53)
Required:
Calculate the Present Value of the after-tax differential recurring cash flows. 53)
______ A)
$26,832 B)
$11,925 C)
$89,718 D)
$112,148 E)
$201,866
54)
Required:
What amount(s) are included in the Total Project approach for the lost tax shield for the new lathe? 54)
______ A)
$<23,141> B)
$23,141 and $<6,332> C)
$23,141, and $10,620 D)
$10,620 E)
$6,332
