- Hoff is considering the sale of a machine with a book value of $80,000 and 3 years remaining in its useful life.
Straight-line depreciation of $25,000 annually is available. The machine has a current market value of $50,000.
What is the cash flow from selling the machine if the tax rate is 40%?
a. $25,000 c. $62,000
b. $50,000 d. $80,000 D, L & H 9e - Hoff is considering the sale of a machine with a book value of $160,000 and 3 years remaining in its useful life.
Straight-line depreciation of $50,000 annually is available. The machine has a current market value of $100,000.
What is the cash flow from selling the machine if the tax rate is 40%?
a. $50,000 c. $124,000
b. $100,000 d. $160,000 L & H 10e - Pebble Co. recently sold a used machine for $40,000. The machine had a book value of $60,000 at the time of the
sale. What is the after-tax cash flow from the sale, assuming the company’s marginal tax rate is 20 percent?
a. $40,000 c. $44,000
b. $60,000 d. $32,000 Barfield
1
. The Alpha Beta Corporation disposes of a capital asset with an original cost of $85,000 and accumulated
depreciation of $54,500 for $25,000. Alpha Beta’s tax rate is 40%. Calculate the after-tax cash inflow from the
disposal of the capital asset. (M)
a. $2,200 c. $27,200
b. ($2,200) d. $31,500 Horngren
Sold at a Gain - Acme is considering the sale of a machine with a book value of $80,000 and 3 years remaining in its useful life.
Straight-line depreciation of $25,000 annually is available. The machine has a current market value of $100,000.
What is the cash flow from selling the machine if the tax rate 40%.
a. $25,000 c. $92,000
b. $80,000 d. $100,000 D, L & H 9e - Acme is considering the sale of a machine with a book value of $160,000 and 3 years remaining in its useful life.
Straight-line depreciation of $50,000 annually is available. The machine has a current market value of $200,000.
What is the cash flow from selling the machine if the tax rate is 40%?
a. $50,000 c. $184,000
b. $160,000 d. $200,000 L & H 10e
2
. A corporation with a taxable income of $200,000 and a 40 percent tax rate is considering the sale of an asset. The
original cost of the asset is $10,000, with $6,000 of its depreciated. How much total after-tax cash will be produced
from the sale of the asset for $12,000?
a. $10,400 d. $(3,200)
b. $12,000 e. $8,800
c. $11,200 H & M
Initial Net Cash Investment
After Tax Cash Inflow of Sale of Old Machine at a Gain - 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: (E)
a. $500. c. $200.
b. $300. d. $100. G & N 9e
Old Machine Sold at Book Value - Hatchet Company is considering replacing a machine with a book value of $400,000, a remaining useful life of 5
years, and annual straight-line depreciation of $80,000. The existing machine has a current market value of
$400,000. The replacement machine would cost $550,000, have a 5-year life, and save $75,000 per year in cash
operating costs. If the replacement machine would be depreciated using the straight-line method and the tax rate is
40%, what would be the net investment required to replace the existing machine? (D)
a. $90,000. c. $330,000
b. $150,000 d. $550,000 D, L & H 9e - Big City Motors is trying to decide whether it should keep its existing car washing machine or purchase a new one
that has technological advantages (which translate into cost savings) over the existing machine. Information on each
machine follows:
Old machine New machine
Original cost $9,000 $20,000
Accumulated depreciation 5,000 0
Annual cash operating costs 9,000 4,000
Current salvage value of old machine 2,000
Salvage value in 10 years 500 1,000
Remaining life 10 yrs. 10 yrs.
The incremental cost to purchase the new machine is
a. $11,000. c. $13,000.
b. $20,000. d. $18,000. Barfields
Old Machine Sold at a Gain
3
. Regal Industries is replacing a grinder purchased 5 years ago for $15,000 with a new one costing $25,000 cash.
The original grinder is being depreciated on a straight-line basis over 15 years to a zero salvage value. Regal will
sell this old equipment to a third party for $6,000 cash. The new equipment will be depreciated on a straight-line
basis over 10 years to a zero salvage value. Assuming a 40% marginal tax rate, Regal’s net cash investment at the
time of purchase if the old grinder is sold and the new one is purchased is
a. $19,000 c. $17,400
b. $15,000 d. $25,000 CMA 1292 4-9
4
. A machine that cost $50,000 and is fully depreciated is sold for $10,000. The $10,000 is then used as a down
payment on the purchase of a new machine costing $75,000. Assuming a 40% tax rate, the out-of-pocket cost of
the new machine is:
A. $75,000 C. $65,000
B. $71,000 D. $69,000 C & U
Old Equipment Sold at a Loss
*. In making a decision to invest in a project the cash flow should be adjusted for their tax effect. Assume an income
tax rate of 35% an old machine with a book value of P70,000 will be replaced by a new machine costing P150,000.
The market value of the old machine is P50,000. The after tax investment outlay is (E)
a. P82,500 c. P107,000
b. P93,000 d. P135,000 RPCPA 1085
*. In deciding the investment in a project, cash flows should be adjusted for their tax effect. Assume an income tax
rate of 35%. An old equipment with a book value of P15,000 will be replaced by a new equipment costing P50,000.
The market value of the old equipment is P11,000. The after-tax investment outlay is (E)
a. P34,400 c. P39,000
b. P37,600 d. P40,400 RPCPA 0581
Old Equipment Sold at a Loss, Additional Working Capital
*. Diliman Republic Publishers, Inc. is considering replacing an old press that cost P800,000 six years ago with a new
one that would cost P2,250,000. Shipping and installation would cost an additional P200,000. The old press has a
book value of P150,000 and could be sold currently for P50,000. The increased production of the new press would
increase inventories by P40,000, accounts receivable by P160,000 and accounts payable by P140,000. Diliman
Republic’s net initial investment for analyzing the acquisition of the new press assuming a 35% income tax rate
would be (D)
a. P2,450,000 c. P2,600,000
b. P2,425,000 d. P2,250,000 RPCPA 0595 - Superstrut is considering replacing an old press that cost $80,000 six years ago with a new one that would cost
$245,000. The old press has a net book value of $15,000 and could be sold for $5,000. The increased production of
the new press would 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: (M)
a. $256,000. c. $250,000.
b. $242,000. d. $245,000. CMA adapted
Old Machine Sold at a Loss, Cash Cost Savings on New Machine
5
. A company is considering replacing existing 2-year-old equipment. This project will require a discounted cash flow
analysis to determine if the benefits exceed the costs. Year-end data regarding the existing and new equipment are
shown below.
Existing Equipment New Equipment
Original cost $600,000 $540,000
Useful life (in years) 5 3
Remaining life (in years) 3 3
Annual depreciation $120,000 $180,000
Accumulated depreciation $240,000 N/A*
Book value $360,000 N/A*
Current cash disposal value $100,000 N/A*
- Value is not applicable here.
The new equipment will result in cash operating cost savings of $150,000 annually, before taxes. The new
equipment would be purchased late in the current year to be operational at the beginning of the first year of the
project. The existing equipment would be sold early in the first year of the project, meaning no further depreciation
would be taken on it. The company has an effective income tax rate of 40%. Of the following, which are the correct
figures to be used in the cash flow analysis for the first year of this proposed project? CIA 0596 III-78
After-Tax Cash
Operating Savings
Proceeds from Sale
of Existing Equipment
Tax Benefit from Sale
of Existing Equipment
A. $90,000 $100,000 $0
B. $60,000 $ 60,000 $104,000
C. $90,000 $100,000 $104,000
D. $60,000 $ 40,000 $156,000
Old Machine Traded-in
6
. A machine that cost $50,000 and is fully depreciated is allowed as a $10,000 trade-in on a machine costing
$75,000. Assuming a 40% tax rate, the out-of-pocket cost of the new machine is:
A. $75,000 C. $65,000
B. $71,000 D. $69,000 C & U
Old Machine Traded-in, Avoidable Cost
*. Key Corp. plans to replace a production machine that was acquired several years ago. Acquisition cost is P450,000
with salvage value of P50,000. The machine being considered is worth P800,000 and the supplier is willing to
accept the old machine at a trade-in value of P60,000. Should the company decide not to acquire the new machine,
it needs to repair the old one at a cost of P200,000. Tax-wise, the trade-in transaction will not have any implication
but the cost to repair is tax-deductible. The effective corporate tax rate is 35% of net income subject to tax. For
purposes of capital budgeting, the net investment in the new machine is (M)
a. P540,000 c. P660,000
b. P610,000 d. P800,000 RPCPA 0597
Old Machine Traded-in, Other Assets Written Off, Avoidable Cost, Additional Working Capital
*. Great Value Company is planning to purchase a new machine costing P50,000 with freight and installation costs
amounting to P1,500. The old unit is to be traded-in will be given a trade-in allowance of P7,500. Other assets that
are to be retired as a result of the acquisition of the new machine can be salvaged and sold for P3,000. The loss on
retirement of these other assets is P1,000 which will reduce income taxes of P400. If the new equipment is not
purchased, repair of the old unit will have to be made at an estimated cost of P4,000. This cost can be avoided by
purchasing the new equipment. Additional gross working capital of P12,000 will be needed to support operation
planned with the new equipment.
The net investment assigned to the new machine for decision analysis is (D)
a. P50,200 c. P53,600
b. P52,600 d. P57,600 RPCPA 1080
Initial Cash Outlay
7
. Lawson Inc. is expanding its manufacturing plant, which requires an investment of $4 million in new equipment and
plant modifications. Lawson’s sales are expected to increase by $3 million per year as a result of the expansion.
Cash investment in current assets averages 30% of sales; accounts payable and other current liabilities are 10% of
sales. What is the estimated total investment for this expansion? (E)
A. $3.4 million. C. $4.6 million.
B. $4.3 million. D. $4.9 million. CMA 1295 4-8
8
. Kline Corporation is expanding its plant, which requires an investment of $8 million in new equipment. Kline’s sales
are expected to increase by $6 million per year as a result of the expansion. Cash investment in current assets
averages 30% of sales, and accounts payable and other current liabilities are 10% of sales. What is the estimated
total cash investment for this expansion? (E)
A. $6.8 million. C. $9.2 million.
B. $8.6 million. D. $9.8 million. Gleim
Tax on Sale of Old Machine
9
. A machine with a book value of $30,000 could be sold for $40,000. The corporation that owns the machine has
taxable income of $35,000 and a 40 percent tax rate. What would be the tax on the sale of the machine?
a. $0 d. $4,000
b. $10,000 e. $13,600
c. $6,000 H & M
Opportunity Costs
- A firm owns a building with a book value of $100,000 and a market value of $250,000. If the building is utilized for a
project, then the opportunity cost ignoring taxes is:
A. $100,000 C. $250,000
B. $150,000 D. None of the above B & M - A firm has a general-purpose machine which has a book value of $500,000 and is sold for $600,000 in the market.
If the tax rate is 30%, what is the opportunity cost of using the machine in a project?
A. $500,000 C. $570,000
B. $600,000 D. None of the above B & M
Working Capital - For project A in year 2, inventories increase by $16,000 and accounts payable by $4,000. Calculate the increase or
decrease in net working capital for year 2. (E)
A. Increases by $12,000 C. Increases by $16,000
B. Decreases by $12,000 D. Decreases by $16,000 B & M - For project X, year 5 inventories decrease by $5,000, accounts receivable by $3,000 and accounts payables by
$2,000. Calculate the increase or decrease in working capital for year 5. (E)
A. Increases by $6,000 C. Increases by $8,000
B. Decreases by $6,000 D. Decreases by $7,000 B & M - A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current
accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by
$40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by
$10,000, and longterm debt by $100,000. The change in net working capital is (E)
A. an increase of $120,000. C. a decrease of $120,000.
B. a decrease of $40,000. D. an increase of $60,000. Gitman - A corporation is considering expanding operations to meet growing demand. With the capital expansion the current
accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable by
$20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by
$30,000, and longterm debt by $80,000. The change in net working capital is (E)
A. an increase of $10,000. C. a decrease of $90,000.
B. a decrease of $10,000. D. an increase of $80,000. Gitman
Cash Inflow
Before-tax Cash Inflow - C Corp. faces a marginal tax rate of 35 percent. One project that is currently under evaluation has a cash flow in the
fourth year of its life that has a present value of $10,000 (after-tax). C Corp. assumes that all cash flows occur at the
end of the year and the company uses 11 percent as its discount rate. What is the pre-tax amount of the cash flow in
year 4? (Round to the nearest dollar.) (M)
a. $15,181 c. $9,868
b. $23,356 d. $43,375 Barfield - At the Bartholomew Company last year all sales were for cash and all expenses were paid in cash. The tax rate was
30%. If 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: (M)
a. $65,000. c. $45,000.
b. $60,000. d. $50,000. G & N 9e
Timing of Cash Flow
10
. Assume that the interest rate is greater than zero. Which of the following cash-inflow streams should you prefer?
Gleim
Year 1 Year 2 Year 3 Year 4
A. $400 $300 $200 $100
B. $100 $200 $300 $400
C. $250 $250 $250 $250
D. Any of these, since they each sum to $1,000.
After-tax Net Cash Inflow for a Certain Year - You are given the following data for year 1. Revenue = $43; Total costs = $30; Depreciation = $3; Tax rate = 30%.
Calculate the cash flow for the project for year 1. (E)
A. $7 C. $13
B. $10 D. None of the above B & M - You are given the following data for year 1: Revenues = 100, Fixed costs = 30; Total variable costs = 50;
Depreciation = $10; Tax rate = 30%. Calculate the after tax cash flow for the project for year 1. (E)
A. $17 C. $10
B. $7 D. None of the above B & M
After-Tax Net Cash Inflow - Last year the sales at Jersey Company were $200,000 and were all cash sales. The expenses at Jersey were
$125,000 and were all cash expenses. The tax rate was 30%. The after-tax net cash inflow at Jersey last year from
these operations was: (E)
a. $37,500. c. $22,500.
b. $60,000. d. $52,500. G & N 9e - 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 (E)
a. $800,000. c. $560,000.
b. $640,000. d. $240,000. G & N 9e - Last year the sales at Seidelman Company were $700,000 and were all cash sales. The company’s expenses were
$450,000 and were all cash expenses. The tax rate was 35%. The after-tax net cash inflow at Seidelman last year
was: (E)
a. $700,000. c. $162,500.
b. $250,000. d. $87,500. G & N 9e
11
. A project is expected to result in the following adjustments over the next year:
Cash sales increase by 400,000.
Expenses (except depreciation) increase by 180,000.
Depreciation increases by 80,000.
Assume the corporate tax rate is 34%. The total relevant net cash flows during that year are
A. 92,400 C. 172,400
B. 140,000 D. 220,000 CIA 0591 IV-52
Annual Cash Inflow
12
. A company considers a project that will generate cash sales of $50,000 per year. Fixed costs will be $10,000 per
year, variable costs will be 40% of sales, and depreciation of the equipment in the project will be $5,000 per year.
Taxes are 40%. The expected annual cash flow to the company resulting from the project is
A. $15,000 C. $19,000
B. $9,000 D. $14,000 CIA 1193 IV-50
*. Guemon Company is taking into account the replacement of an old machine now in use with a new machine costing
P100,000. The replacement is expected to produce an annual cash savings of P22,500 before income taxes.
The estimated useful life of the new machine is ten years with no residual value. The book value of the old machine
is P37,500 and is expected to last for another five years. It is being depreciated at P8,000 per year. The income
tax rate is 25%.
The annual cash savings after tax is (M)
a. P15,375 c. P17,375
b. P16,875 d. P20,520 RPCPA 0583
Total Cash Inflow
13
. The Phenom Corporation has an annual cash inflow from operations from its investment in a capital asset of
$50,000 for five years. The corporation’s income tax rate is 40%. Calculate the five years total after-tax cash inflow
from operations. (M)
a. $250,000 c. $150,000
b. $175,000 d. $50,000 Horngren
Cash Outflow
Before-Tax Cash Outflow - Consider a machine which costs $115,000 now and which has a useful life of seven years. This machine will require
a major 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: (E)
a. $6,000. c. $2,160.
b. $9,000. d. $1,440. G & N 9e
“End-of-Life” Cash Flow
Based on Internal Rate of Return
*. A company is considering putting up P50,000 in a three-year project. The company’s expected rate of return is
12%. The present value of P1.00 at 12% for one year is 0.893, for two years is 0.797, and for three years is 0.712.
The cash flow, net of income taxes will be P18,000 (present value of P16,074) for the first year and P22,000
(present value of P17,534) for the second year. Assuming that the rate of return is exactly 12%, the cash flow, net
of income taxes, for the third year would be (M)
a. P7,120 c. P16,392
b. P10,000 d. P23,022 RPCPA 1081
Machine Sold at a Gain, Working Capital Released
14
. Garfield Inc. is considering a 10-year capital investment project with forecasted revenues of $40,000 per year and
forecasted cash operating expenses of $29,000 per year. The initial cost of the equipment for the project is
$23,000, and Garfield expects to sell the equipment for $9,000 at the end of the tenth year. The equipment will be
depreciated over 7 years. The project requires a working capital investment of $7,000 at its inception and another
$5,000 at the end of year 5. Assuming a 40% marginal tax rate, the expected net cash flow from the project in the
tenth year is (D)
a. $32,000 c. $20,000
b. $24,000 d. $11,000 CMA 1292 4-10
Machine Sold at a Gain, Cost to Remove
*. Lor Industries is analyzing a capital investment proposal for new machinery to produce a new product over the next
ten years. At the end of the ten years, the machinery must be disposed of with a zero net book value but with a
scrap salvage value of P20,000. It will require some P30,000 to remove the machinery. The applicable tax rate is
35%. The appropriate “end-of-life” cash flow based on the foregoing information is (D)
a. Inflow of P30,000. c. Outflow of P10,000.
b. Outflow of P6,500. d. Outflow of P17,000. RPCPA 0596
Machine Sold at a Taxable Loss, Cost to Remove
15
. Kore Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8
years. The analyst is attempting to determine the appropriate “end-of-life” cash flows for the analysis. At the end of
8 years, the equipment must be removed from the plant, and will have a net book value of zero, a tax basis of
$75,000, a cost to remove of $40,000, and scrap salvage value of $10,000. Kore’s effective tax rate is 40%. What
is the appropriate “end-of-life” cash flow related to these items that should be used in the analysis? (D)
a. $45,000 c. $12,000
b. $27,000 d. $(18,000) CMA 1295 4-15
16
. Metrejean Industries is analyzing a capital investment proposal for new equipment to produce a product over the
next 8 years. At the end of 8 years, the equipment must be removed from the plant and will have a net book value
of $0, a tax basis of $150,000, a cost to remove of $80,000, and scrap salvage value of $20,000. Metrejean’s
effective tax rate is 40%. What is the appropriate “end-of-life” cash flow related to these items that should be used
in the analysis? (D)
a. $90,000 c. $24,000
b. $54,000 d. $(36,000) Gleim
Tax Savings
On Depreciation
17
. If the tax rate is 40% and a company has $400,000 of income, a depreciation deduction of $50,000 would result in
a tax savings of
a. $17,000 c. $30,000
b. $20,000 d. $33,000 H & M
18
. If the tax rate is 40% and a company has $400,000 of income, a depreciation deduction of $80,000 would result in a
tax savings of
a. $52,800 c. $32,000
b. $48,000 d. $27,200 H & M - If the depreciation amount is $100,000 and the marginal tax rate is 30%, then the tax shield due to depreciation is:
(E)
A. $333,333 C. $30,000
B. $100,000 D. None of the above B & M - If the depreciation amount is 600,000 and the marginal tax rate is 35%, then the tax shield due to depreciation is:
(E)
A. $180,000 C. $210,000
B. $600,000 D. None of the above B & M - 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 income for the year, then the tax
savings from the deprecation tax shield related to this machine for the year of purchase would be: (E)
a. $3,900. c. $13,000.
b. $9,100. d. $0. G & N 9e - 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: (E)
a. $4,800 inflow. c. $4,800 outflow.
b. $3,200 inflow. d. $3,200 outflow. G & N 9e
Incremental Before-tax Profit
19
. Maxwell Company has an opportunity to acquire a new machine to replace one of its present machines. The new
machine would cost $90,000, have a 5-year life, and no estimated salvage value. Variable operating costs would be
$100,000 per year. The present machine has a book value of $50,000 and a remaining life of 5 years. Its disposal
value now is $5,000, but it would be zero after 5 years. Variable operating costs would be $125,000 per year.
Ignore income taxes. Considering the 5 years in total, what would be the difference in profit before income taxes by
acquiring the new machine as opposed to retaining the present one?
A. $10,000 decrease C. $35,000 increase
B. $15,000 decrease D. $40,000 increase C & U
Net Cash Flow
Present Value of Net Cash Flow
20
. At the end of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000,
$10,000, and $15,000, respectively. What are the cash flows worth today if a 3% interest rate properly reflects the
time value of money in this situation? (E)
A. $41,556. C. $32,400.
B. $47,700. D. $38,100. S, S & T - As a 19th century economist, you are faced with the following problem. The world’s shipping fleet consists of
steamships and sailing ships. Each can be used to carry cargo or passengers. The ships have similar sailing
capacities but differ in their annual operating costs as follows:
Steam Sail
Cargo $80,000 $95,000
Passenger $90,000 100,000
Assume: (i) Fares are competitively determined, (ii) demand is not expected to change, (iii) each vessel has a life of
15 years, (iv) current salvage value of either ship (sailing or steam) is $114,091, and (v) Cost of capital is 10%, (vi)
no taxes. What is the present value of a steam ship?
A. $190,152 C. $609,486
B. $251,326 D. None of the above B & M - As a 19th century economist, you are faced with the following problem. The world’s shipping fleet consists of
steamships and sailing ships. Each can be used to carry cargo or passengers. The ships have similar sailing
capacities but differ in their annual operating costs as follows:
Steam Sail
Cargo $80,000 $95,000
Passenger $90,000 100,000
Assume: (i) Fares are competitively determined, (ii) demand is not expected to change, (iii) each vessel has a life of
15 years, (iv) current salvage value of either ship (sailing or steam) is $114,091, and (v) Cost of capital is 10%, (vi)
no taxes. If the cost of carrying cargo by sailing ship were $75,000 per year, what would be the present value of a
steamship?
A. $114,091 C. $215,000
B. $152,814 D. None of the above B & M
Present Value of 1 Computations
Present Value of Taxable Cash Receipts - A company anticipates a taxable cash receipt of $50,000 in year 4 of a project. The company’s tax rate is 30% and
its discount rate is 12%. The present value of this future cash flow is closest to: (M)
a. $22,243. c. $9,533.
b. $35,000. d. $15,000. G & N 9e - A company anticipates a taxable cash receipt of $20,000 in year 3 of a project. The company’s tax rate is 30% and
its discount rate is 8%. The present value of this future cash flow is closest to: (M)
a. $6,000. c. $14,000.
b. $4,763. d. $11,114. G & N 9e - A company anticipates a taxable cash receipt of $50,000 in year 3 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: (M)
a. $10,125. c. $23,624.
b. $35,000. d. $15,000. G & N 9e
Present Value of After-Tax Cash Expense - A company anticipates a taxable cash expense of $10,000 in year 2 of a project. The company’s tax rate is 30% and
its discount rate is 8%. The present value of this future cash flow is closest to: (M)
a. ($3,000). c. ($7,000).
b. ($2,572). d. ($6,001). G & N 9e - A company anticipates a taxable cash expense of $40,000 in year 2 of a project. The company’s tax rate is 30% and
its discount rate is 10%. The present value of this future cash flow is closest to: (M)
a. ($23,140). c. ($12,000).
b. ($9,917). d. ($28,000). G & N 9e - A company anticipates a taxable cash expense of $60,000 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: (M)
a. ($13,850). c. ($32,318).
b. ($42,000). d. ($18,000). G & N 9e - Suppose a machine costs $20,000 now, has an expected life of eight years, and will require a $7,000 overhaul at
the end of the third year. If the tax rate is 40%, then the after-tax cost of this overhaul would be: (E)
a. $12,000. c. $8,000.
b. $4,200. d. $2,800. G & N 9e - A company had tax-deductible cash expenses of $650,000 last year and the tax rate was 30%. The after-tax net
cash outflow for these expenses was: (E)
a. $195,000. c. $650,000.
b. $455,000. d. $390,000. G & N 9e
Present Value of Depreciation Tax Shield - A company anticipates a depreciation deduction of $20,000 in year 2 of a project. The company’s tax rate is 30%
and its discount rate is 12%. The present value of the depreciation tax shield resulting from this deduction is closest
to: (M)
a. $11,161. c. $6,000.
b. $14,000. d. $4,783. G & N 9e - A company anticipates a depreciation deduction of $30,000 in year 3 of a project. The company’s tax rate is 30%
and its discount rate is 12%. The present value of the depreciation tax shield resulting from this deduction is closest
to: (M)
a. $21,000. c. $6,406.
b. $14,947. d. $9,000. G & N 9e - A company anticipates a depreciation deduction of $70,000 in year 2 of a project. The company’s tax rate is 30%
and its discount rate is 14%. The present value of the depreciation tax shield resulting from this deduction is closest
to: (M)
a. $16,159. c. $21,000.
b. $49,000. d. $37,704. G & N 9e
Present Value of Salvage Value
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. The following information pertains to an investment:
Investment $120,000
Annual revenues $70,000
Annual variable costs $15,000
Annual fixed out-of-pocket costs $11,000
Salvage value $27,000
Discount rate 16%
Expected life of project 3 years
Ignoring income taxes, the present value of the salvage value is (rounded) (E)
a. $15,673 c. $17,307
b. $17,550 d. $23,220
Present Value of Working Capital Released at End-of-Life - A project under consideration by the White Corp. would require a working capital investment of $200,000. The
working capital would be liquidated at the end of the project’s 10-year life. If White Corp. has an after-tax cost of
capital of 10 percent and a marginal tax rate of 30 percent, what is the present value of the working capital cash flow
expected to be received in year 10?
a. $36,868 c. $53,970
b. $77,100 d. $23,130 Barfield - A company needs an increase in working capital of $20,000 in project that will last 4 years. The company’s tax rate
is 30% and its discount rate is 10%. The present value of the release of the working capital at the end of the project
is closest to: (M)
a. $6,000. c. $9,562.
b. $13,660. d. $14,000. G & N 9e - A company needs an increase in working capital of $50,000 in project that will last 4 years. The company’s tax rate
is 30% 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: (M)
a. $36,751. c. $25,726.
b. $15,000. d. $35,000. G & N 9e - A company needs an increase in working capital of $70,000 in project that will last 3 years. The company’s tax rate
is 30% 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: (M)
a. $49,000. c. $38,898.
b. $21,000. d. $55,568. G & N 9e
Present Value of Annuity of 1 Computation
Present Value of Annuity of Depreciation Tax Shield - The Salvage Co. is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs
of its operation by a considerable margin. The new ship would cost $500,000 and would be fully depreciated by the
straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be sunk in some
already polluted harbor. The Salvage Co.’s cost of capital is 12 percent, and its marginal tax rate is 40 percent. What
is the present value of the depreciation tax benefit of the new ship? (Round to the nearest dollar.)
a. $113,004 c. $169,506
b. $282,510 d. $200,000 Barfield - B Company is considering two alternative ways to depreciate a proposed investment. The investment has an initial
cost of $100,000 and an expected five-year life. The two alternative depreciation schedules follow:
Method 1 Method 2
Year 1 depreciation $20,000 $40,000
Year 2 depreciation $20,000 $30,000
Year 3 depreciation $20,000 $20,000
Year 4 depreciation $20,000 $10,000
Year 5 depreciation $20,000 $0
Assuming that the company faces a marginal tax rate of 40 percent and has a cost of capital of 10 percent, what is
the difference between the two methods in the present value of the depreciation tax benefit?
a. $7,196 c. $2,878
b. $0 d. $6,342 Barfield
