Documente Academic
Documente Profesional
Documente Cultură
True/False
ManagerialAccounting,9/e 40
11. Due to the half-year convention, assets in the 3-year property
T class are depreciated over four years.
Medium
15. Under the MACRS system, any salvage value realized when an
T asset is sold is taxed if the asset has exceeded the useful
Hard life assumed in its property class.
Multiple Choice
41 ManagerialAccounting,9/e
19. The use of the MACRS tables instead of the optional straight-
C line method of depreciation has the effect of:
Medium a. raising the hurdle rate necessary to justify the project.
CMA b. decreasing the net present value of the project.
adapted c. increasing the present value of the depreciation tax shield.
d. increasing the cash outflows at the beginning of the
project.
22. Which of the following would decrease the net present value of
D a project?
Hard a. A decrease in the income tax rate.
CMA b. A decrease in the initial investment.
adapted c. An increase in the useful life of the project.
d. An increase in the discount rate.
ManagerialAccounting,9/e 42
24. A company anticipates a taxable cash receipt of $50,000 in year
A 4 of a project. The company's tax rate is 30% and its discount
Medium rate is 12%. The present value of this future cash flow is
closest to:
a. $22,243.
b. $35,000.
c. $9,533.
d. $15,000.
43 ManagerialAccounting,9/e
29. A company anticipates a taxable cash expense of $60,000 in year
C 2 of a project. The company's tax rate is 30% and its discount
Medium rate is 14%. The present value of this future cash flow is
closest to:
a. ($13,850).
b. ($42,000).
c. ($32,318).
d. ($18,000).
ManagerialAccounting,9/e 44
34. A company needs an increase in working capital of $50,000 in
A project that will last 4 years. The company's tax rate is 30%
Medium and its discount rate is 8%. The present value of the release
of the working capital at the end of the project is closest to:
a. $36,751.
b. $15,000.
c. $25,726.
d. $35,000.
45 ManagerialAccounting,9/e
39. Consider a machine which costs $115,000 now and which has a
A useful life of seven years. This machine will require a major
Hard overhaul at the end of the fourth year which will cost "X"
dollars. If the tax rate is 40%, and if the after-tax cash
outflow for this overhaul is $3,600, then the amount of "X" in
dollars is:
a. $6,000.
b. $9,000.
c. $2,160.
d. $1,440.
40. Last year the sales at Jersey Company were $200,000 and were
D all cash sales. The expenses at Jersey were $125,000 and were
Easy all cash expenses. The tax rate was 30%. The after-tax net cash
inflow at Jersey last year from these operations was:
a. $37,500.
b. $60,000.
c. $22,500.
d. $52,500.
41. Last year a firm had taxable cash receipts of $800,000 and the
C tax rate was 30%. The after-tax net cash inflow from these
Easy receipts was
a. $800,000.
b. $640,000.
c. $560,000.
d. $240,000.
43. At the Bartholomew Company last year all sales were for cash
D and all expenses were paid in cash. The tax rate was 30%. If
Medium the after-tax net cash inflow from these operations last year
was $10,500, and if the total before tax cash expenses were
$35,000, then the total before-tax cash sales must have been:
a. $65,000.
b. $60,000.
c. $45,000.
d. $50,000.
ManagerialAccounting,9/e 46
44. Superstrut is considering replacing an old press that cost
B $80,000 six years ago with a new one that would cost $245,000.
Medium The old press has a net book value of $15,000 and could be sold
CMA for $5,000. The increased production of the new press would
adapted require an investment in additional working capital of $6,000.
The company's tax rate is 40%. Superstrut's net investment now
in the project would be:
a. $256,000.
b. $242,000.
c. $250,000.
d. $245,000.
46. Last year the sales at Seidelman Company were $700,000 and were
C all cash sales. The company's expenses were $450,000 and were
Easy all cash expenses. The tax rate was 35%. The after-tax net cash
inflow at Seidelman last year was:
a. $700,000.
b. $250,000.
c. $162,500.
d. $87,500.
47 ManagerialAccounting,9/e
Reference: 15-1
The Lorenz Company is deciding whether or not it should replace an old piece
of equipment with new equipment that is more efficient. The following data
relate to this investment decision:
The old equipment is in the MACRS 5-year property class and is being
depreciated by the optional straight-line method, but this equipment will
last for seven more years. The new equipment is also in the MACRS 5-year
property class and will be depreciated using MACRS tables. The tax rate is
30% and the company's after-tax cost of capital is 12%. The following
questions are based on the incremental-cost approach to the net present
value method. All questions should be answered from point of view of
replacing the old equipment with the new equipment.
47. The present value of the net annual savings in cash operating
A costs (for all years) in favor or the new equipment is closest
Medium to:
Refer To: a. $63,896.
15-1 b. $91,280.
c. $159,740.
d. $223,636.
48. The present value of the overhaul of the old equipment that is
B avoided is closest to:
Easy a. $15,000.
Refer To: b. $6,678.
15-1 c. $10,500.
d. $9,540.
49. The present value of the tax savings at the end of one year
D from the loss on the sale of the old equipment is closest to:
Medium a. $10,000.
Refer To: b. $3,000.
15-1 c. $7,000.
d. $2,679.
ManagerialAccounting,9/e 48
50. The present value of the difference in tax savings between the
C two pieces of equipment (for all years) arising from the
Hard depreciation tax shield in favor of the new equipment is
Refer To: closest to:
15-1 a. $24,000.
b. $26,571.
c. $16,751.
d. $12,912.
Reference: 15-2
The Moon Company is contemplating the purchase of a new machine to replace
an old machine. The following data are available concerning this investment
possibility:
New machine:
Purchase price now ............................. $50,000
Annual cash operating costs .................... $20,000
Useful life .................................... 7 years
Salvage value at the end of seven years ........ $ 3,000
Old machine:
Original purchase price three years ago ........ $40,000
Book value now ................................. $20,000
Annual cash operating costs .................... $30,000
Salvage value at the end of seven years ........ $ 2,000
Overhaul needed four years from now ............ $ 7,000
Salvage value of the machine now ............... $20,000
The machine is in the MACRS 5-year property class and would be depreciated
using the MACRS tables. The old machine is also in the 5-year property class
and is being depreciated by the optional straight-line method. However, this
old machine could last seven more years if overhauled in four years. The
company requires a 12% after-tax return on all equipment purchases, and the
tax rate is 30%. The following questions are based on the total-cost
approach to the net present value method:
51. From the point of view of buying the new machine, the present
A value of the salvage to be received in seven years is closest
Medium to:
Refer To: a. $949.
15-2 b. $2,100.
c. $1,356.
d. $3,000.
52. From the point of view of buying the new machine, the present
D value of the annual cash operating costs (for all years) is
Easy closest to:
Refer To: a. $72,435.
15-2 b. $(72,435).
c. $(95,844).
d. $(63,896).
49 ManagerialAccounting,9/e
53. From the point of view of buying the new machine, the present
C value of the tax savings (for all years) arising from the
Hard depreciation tax shield) is closest to:
Refer To: a. $15,183.
15-2 b. $12,400.
c. $11,071.
d. $10,630.
54. From the point of view of keeping the old machine, the present
D value of the overhaul needed at the end of Year 4 is closest
Easy to:
Refer To: a. $(4,900).
15-2 b. $(5,675).
c. $(7,000).
d. $(3,116).
55. From the point of view of keeping the old machine, the present
B value of the tax savings (for all years) arising from the
Hard depreciation tax shield is closest to:
Refer To: a. $6,000.
15-2 b. $4,910.
c. $15,000.
d. $16,368.
Reference: 15-3
Maxwell Company purchased a new machine January 1 of Year 1. Data relating
to the machine are as follows:
This machine is in the MACRS 5-year property class. Maxwell uses a 10%
discount rate in capital budgeting analysis. The companys tax rate is 30%.
56. If Maxwell uses the MACRS tables, what will be the present
D value of the depreciation tax shield recorded in Year 2 (to the
Medium nearest dollar)?
Refer To: a. $27,754.
15-3 b. $11,894.
c. $33,304.
d. $14,273.
ManagerialAccounting,9/e 50
Reference: 15-4
Shields Company is considering the purchase of a new computer to replace an
old computer. The new computer will have a useful life of six years with a
salvage value of $4,000. The computer will be depreciated using the MACRS
tables, and it belongs in the MACRS 5-year property class. The tax rate is
35%, and the company's after-tax cost of capital is 10%. The new computer
will provide annual savings in cash operating costs (before taxes) of
$15,000. The new computer would cost $45,000. The old fully depreciated
computer it would replace could be sold now for a salvage value of $4,000.
The new computer requires a $3,000 cash investment in working capital which
will be released at the end of six years for use elsewhere.
58. The present value of the after-tax cash flow from the salvage
C received on the sale of the old computer would be:
Medium a. $4,000.
Refer To: b. $1,400.
15-4 c. $2,600.
d. $0.
59. The present value of the tax savings (for all years) resulting
A from the depreciation tax shield is (rounded to the nearest
Hard dollar):
Refer To: a. $12,174.
15-4 b. $22,610.
c. $34,785.
d. $45,000.
61. The present value of the after-tax net cash flows occurring
D during Year 2 (to the nearest dollar) is:
Hard a. $19,948.
Refer To: b. $16,231.
15-4 c. $8,500.
d. $12,217.
62. The present value of the after-tax net cash flows (all cash
B inflows less all cash outflows) occurring during Year 6 (to the
Hard nearest dollar) is:
Refer To: a. $7,480.
15-4 b. $9,172.
c. $7,706.
d. $8,657.
51 ManagerialAccounting,9/e
63. A piece of equipment is in the MACRS 5-year property class and
A is being depreciated by the optional straight-line method. The
Hard tax rate is 35%. If the tax savings from the depreciation tax
Refer To: shield on this equipment is $3,500 in Year 3, then the original
15-4 cost of this equipment was:
a. $50,000.
b. $17,500.
c. $21,000.
d. $52,083.
Reference: 15-5
The Fargo Company is considering a new machine to replace an old machine.
The following data are available:
The new machine is in the MACRS 5-year property class. The company computes
depreciation for tax purposes using MACRS tables. The old machine has been
fully depreciated for tax purposes. Each of the following questions is
independent:
64. The present value of the tax savings (for all years) arising
D from the depreciation tax shield provided by the new machine is
Hard closest to:
Refer To: a. $60,000.
15-5 b. $96,488.
c. $101,295.
d. $40,518.
65. The present value of the after-tax cash inflows (for all years)
A due to the annual cost savings from the new machine is closest
Medium to:
Refer To: a. $165,852.
15-5 b. $276,420.
c. $117,864.
d. $540,000.
66. The present value of the cash flow arising from the salvage
C value of the new machine is closest to:
Medium a. $5,712.
Refer To: b. $2,104.
15-5 c. $3,156.
d. $5,260.
ManagerialAccounting,9/e 52
67. Consider only the cash flows which will occur now. The present
D value of these cash flows is:
Medium a. -$150,000.
Refer To: b. -$135,000.
15-5 c. -$201,000.
d. -$141,000.
Reference: 15-6
The Smith Lumber Company is considering cutting trees on a plot of land to
which it has cutting rights. The following data are available:
The equipment would be in the MACRS 3-year property class, and its cost
would be depreciated using the MACRS tables. This investment project would
end with the reseeding of the land in four years.
68. The present value of the annual cash inflows (in total) from
B the sale of logs is closest to:
Medium a. $251,820.
Refer To: b. $151,092.
15-6 c. $243,198.
d. $100,728.
69. The present value of the tax savings (in total) arising from
A the depreciation tax shield provided by the equipment is
Hard closest to:
Refer To: a. $90,420.
15-6 b. $26,050.
c. $131,917.
d. $220,503.
70. Consider only the cash flows which occur during the fourth
C year. The net present value of the cash flows that occur during
Hard the fourth year (ignoring the depreciation tax shield) is
Refer To: closest to:
15-6 a. $76,000.
b. $22,080.
c. $41,952.
d. $13,248.
53 ManagerialAccounting,9/e
Reference: 15-7
The Elwood Express Company needs a new piece of equipment in order to fill a
contract that it has just signed with the US Army. This equipment will have
a useful life of seven years. It will be depreciated using the MACRS tables,
and it belongs in the MACRS 5-year property class. The new equipment has a
cash purchase cost of $400,000; however, an old, fully depreciated piece of
equipment would be sold now for a salvage value of $25,000. At the end of
seven years, the new equipment will have a salvage value of $30,000. The net
annual cash operating inflows from the contract will be $100,000. The tax
rate is 30%, and the company's after-tax cost of capital is 14%.
71. The present value of the net annual after-tax cash operating
B inflows (for all years) is closest to:
Medium a. $428,800.
Refer To: b. $300,160.
15-7 c. $128,640.
d. $259,780.
72. The present value of the tax savings (for all years) resulting
A from the depreciation tax shield is closest to:
Hard a. $84,635.
Refer To: b. $282,117.
15-7 c. $450,000.
d. $420,000.
73. The present value of the net cash flows (all cash inflows less
D all cash outflows) occurring during year 7 is closest to:
Medium a. $21,000.
Refer To: b. $8,400.
15-7 c. $91,000.
d. $36,400.
74. The present value of the net cash flows (all cash inflows less
C all cash outflows including the depreciation tax shield)
Medium occurring during year 3 is closest to:
Refer To: a. $93,040.
15-7 b. $23,040.
c. $62,802.
d. $15,552.
ManagerialAccounting,9/e 54
Reference: 15-8
Simmons Company is considering two investment projects, A and B. The
following data are available:
Project A Project B
Investment in delivery
trucks now .............. $120,000 --
Investment in working
capital now ............. -- $100,000
Net annual operating cash
inflows .................. 18,000 16,000
Life of the project ........ 7 years 7 years
The delivery trucks will have a total salvage value of $10,000 at the end of
seven years; these trucks are in the 5-year MACRS property class and will be
depreciated by the optional straight-line method. At the end of seven years
the working capital will be released for use elsewhere. The income tax rate
is 30% and Simmons' after-tax cost of capital is 12%.
75. The present value of the after-tax net annual operating cash
C inflows of Project A is closest to:
Medium a. $51,117.
Refer To: b. $82,152.
15-8 c. $57,506.
d. $73,024.
76. The present value of the tax savings (for all years) due to the
D depreciation tax shield for Project A is closest to:
Hard a. $85,237.
Refer To: b. $25,776.
15-8 c. $81,888.
d. $24,566.
Reference: 15-9
Lee Company is considering replacing an old delivery van with a new van. The
following data relate to this investment decision:
The old van is in the MACRS 5-year property class and is being depreciated
by the optional straight-line method, but this van will last for six more
years. The new van also is in the MACRS 5-year property class and will be
depreciated using the MACRS tables. The tax rate is 40% and the company's
after-tax cost of capital is 12%. The following questions are based on the
incremental cost approach to the net present value method. All questions
should be answered from the point of view of replacing the old van with the
new van.
55 ManagerialAccounting,9/e
77. The net incremental outlay for the purchase of the new van is:
D a. $20,000.
Medium b. $13,300.
Refer To: c. $23,200.
15-9 d. $16,800.
78. The present value of the overhaul of the old van that is
C avoided is:
Medium a. $4,628.
Refer To: b. $6,500.
15-9 c. $2,777.
d. $1,851.
Essay
Required:
ManagerialAccounting,9/e 56
Answer:
10% Present
Years Amount Factor Value
Cost of equipment needed .... Now $(300,000) 1.000 $(300,000)
Working capital needed ...... Now ( 50,000) 1.000 ( 50,000)
Net annual cash inflows
$90,000 x (1-0.30) ........ 1-7 63,000 4.868 306,684
Depreciation: Income tax savings
$300,000 x 0.200 x .3 ..... 1 18,000 0.902 16,362
$300,000 x 0.320 x .3 ..... 2 28,800 0.826 23,789
$300,000 x 0.192 x .3 ..... 3 17,200 0.751 12,977
$300,000 x 0.115 x .3 ..... 4 10,350 0.683 7,069
$300,000 x 0.115 x .3 ..... 5 10,350 0.621 6,427
$300,000 x 0.058 x .3 ..... 6 5,220 0.564 2,944
Salvage value
$10,000 x (1-0.30) ........ 7 7,000 0.513 3,591
Working capital released .... 7 50,000 0.513 25,650
Net present value ........... $ 55,493
Required:
57 ManagerialAccounting,9/e
Answer:
ManagerialAccounting,9/e 58
Required:
Compute the net present value of the Elton tract (round all dollar
amounts to the nearest whole dollar) and make a recommendation
regarding the viability of this investment.
Answer:
Cost of
equipment ... 0 $(600,000) - $(600,000) 1.000
$(600,000)
Working capital
needed ...... 0 (85,000) - (85,000) 1.000
(85,000)
Net annual cash
receipts .... 1-10 110,000 1-0.35 71,500 6.145
439,368
Depreciation:
600,000 x 0.143 1 85,800 0.35 30,030 0.909
27,297
600,000 x 0.245 2 147,000 0.35 51,450 0.826
42,497
600,000 x 0.175 3 105,000 0.35 36,750 0.751
27,599
600,000 x 0.125 4 75,000 0.35 26,250 0.683
17,929
600,000 x 0.089 5 53,400 0.35 18,690 0.621
11,607
600,000 x 0.089 6 53,400 0.35 18,690 0.564
10,541
600,000 x 0.089 7 53,400 0.35 18,690 0.513
9,588
600,000 x 0.045 8 27,000 0.35 9,450 0.467
4,413
Cost of restoring
land ........ 10 (70,000) 1-0.35 45,500 0.386
(17,563)
Salvage (15% of
$600,000) ... 10 90,000 1-0.35 58,500 0.386
22,581
Working capital
released .... 10 85,000 - 85,000 0.386
32,810
Net present value $
(56,333)
59 ManagerialAccounting,9/e
negative.
Project
X Z
Cost of equipment ..... $90,000 $140,000
Useful life ........... 6 years 9 years
Annual net cash inflow $25,000 $ 30,000
Salvage value ......... $ 8,000 $ 12,000
Required:
Answer:
a. The net present values of the projects are computed below:
Project Z:
Cost of
equipment .. 0 $(140,000) -- $(140,000) 1.000 $(140,000)
Annual savings 1-9 30,000 1-.30 21,000 5.328 111,888
Depreciation:
$140,000 x 0.1 1 14,000 .30 4,200 0.893 3,751
$140,000 x 0.2 2 28,000 .30 8,400 0.797 6,695
$140,000 x 0.2 3 28,000 .30 8,400 0.712 5,981
ManagerialAccounting,9/e 60
$140,000 x 0.2 4 28,000 .30 8,400 0.636 5,342
$140,000 x 0.2 5 28,000 .30 8,400 0.567 4,763
$140,000 x 0.1 6 14,000 .30 4,200 0.507 2,129
Salvage ...... 9 12,000 1-.30 8,400 0.361 3,032
Net present value $3,581
b.
Profitability index = Present value of cash inflows Investment
61 ManagerialAccounting,9/e
84. Snyder Company is trying to decide whether to invest in one of
Hard two projects, A or B. Data for each investment project follow:
Project
A B
Cost of equipment........................ $100,000 $150,000
Useful life.............................. 6 years 6 years
Estimated net annual cash inflow......... $ 30,000 $ 44,000
Salvage value at the end of useful life.. $ 9,000 $ 14,000
Required:
Answer:
a.
Project A:
Tax After-tax 12% Present
Year Cash Flow Effect Cash Flow Factor _Value
Cost of
equipment 0 $(100,000) - $(100,000) 1.000
$(100,000)
Annual
savings ... 1-6 30,000 1-0.35 19,500 4.111
80,165
Depreciation:
100,000 x 0.1 1 10,000 0.35 3,500 0.893
3,126
100,000 x 0.2 2 20,000 0.35 7,000 0.797
5,579
100,000 x 0.2 3 20,000 0.35 7,000 0.712
4,984
100,000 x 0.2 4 20,000 0.35 7,000 0.636
4,452
100,000 x 0.2 5 20,000 0.35 7,000 0.567
3,969
100,000 x 0.1 6 10,000 0.35 3,500 0.507
1,775
Salvage ..... 6 9,000 1-0.35 5,850 0.507
2,966
Net present value $
7,016
ManagerialAccounting,9/e 62
Project B:
b.
Profitability index = present value of cash inflows/investment
Project
X Z
Cost of equipment ..................... $ 90,000 $140,000
Useful life ........................... 6 years 6 years
Estimated net annual cash inflow ...... $ 25,000 $ 30,000
Salvage value at the end of useful life $ 8,000 $ 12,000
Required:
63 ManagerialAccounting,9/e
a. Compute the net present value of each project and indicate
which appears preferable in terms of net present value.
Round all computations to the nearest dollar.
b. Compute the profitability index for each project, and
indicate which project would be preferable using this
investment criterion.
ManagerialAccounting,9/e 64
Answer:
a.
Project X:
Tax After-tax 12% Present
Year Cash Flow Effect Cash Flow Factor _Value
Cost of
equipment 0 $(90,000) - $(90,000) 1.000 $(90,000)
Annual
savings ... 1-6 25,000 1-0.35 16,250 4.111 66,804
Depreciation:
90,000 x 0.1 1 9,000 0.35 3,150 0.893 2,813
90,000 x 0.2 2 18,000 0.35 6,300 0.797 5,021
90,000 x 0.2 3 18,000 0.35 6,300 0.712 4,486
90,000 x 0.2 4 18,000 0.35 6,300 0.636 4,006
90,000 x 0.2 5 18,000 0.35 6,300 0.567 3,572
90,000 x 0.1 6 9,000 0.35 3,150 0.507 1,597
Salvage ..... 6 8,000 1-0.35 5,200 0.507 2,636
Net present value $ 935
Project Z:
b.
Profitability index = present value of cash inflows/investment
65 ManagerialAccounting,9/e
86. Vasquez Company has been offered a 7-year contract to supply a
Hard part to a major aircraft manufacturer. After careful study, the
company has developed the following data relating to the
contract:
Required:
Answer:
ManagerialAccounting,9/e 66
87. A company is considering purchasing an asset for $50,000 which
Medium would have a useful life of 4 years. The asset belongs to the
MACRS 3 year property class and would be depreciated for tax
purposes using the MACRS optional straight-line method. The
asset would generate annual net cash inflows of $20,000
throughout its useful life. There would be a need for an
increase in working capital of $2,000 which would be released
at the end of the project. The asset's salvage value would be
$5,000. The company's tax rate is 40% and its discount rate is
10%.
Required:
Answer:
10% Present
Years Amount Factor Value
Cost of asset ............. Now $(50,000) 1.000 $(50,000)
Working capital needed .... Now $ (2,000) 1.000 $ (2,000)
Net annual cash inflows ... 1-4 $ 12,000 3.170 $ 38,040
Depreciation tax shield:
1 $ 3,333 0.909 $ 3,030
2 $ 6,667 0.826 $ 5,507
3 $ 6,667 0.751 $ 5,007
4 $ 3,333 0.683 $ 2,277
$ 15,821
Required:
Answer:
67 ManagerialAccounting,9/e
12% Present
Years Amount Factor Value
Cost of asset ........... Now $(60,000) 1.000 $(60,000)
Working capital needed .. Now $ (6,000) 1.000 $ (6,000)
Net annual cash inflows 1-5 $ 15,600 3.605 $ 56,238
Depreciation tax shield:
1 $ 7,992 0.893 $ 7,137
2 $ 10,680 0.797 $ 8,512
3 $ 3,552 0.712 $ 2,529
4 $ 1,776 0.636 $ 1,130
$ 19,308
ManagerialAccounting,9/e 68