Question 1: Robin Company is considering the purchase of a new $80,000 delivery van. The van will have a useful life of 5 years, no terminal salvage value, and tax depreciation will be calculated using the straight-line method. If the van is purchased, the company will be able to increase annual revenues by $90,000 per year for the life of the van, but out-of-pocket expenses will also increase by $60,000 per year. Assume a tax rate of 40% and a required after-tax rate of return equal to 10%. The annual net after-tax cash effect of operations, exclusive of depreciation, is a(n):
a) $18,000 inflow
b) $30,000 inflow
c) $12,000 inflow
d) $2,000 inflow
Question 2: ________ shows the financial consequences that would occur if actual cash flows differ from expected cash flows.
a) Discount analysis
b) Interest analysis
c) Sensitivity analysis
d) Forecasting
Question 3: Accelerated depreciation for tax purposes will generally produce a present value of tax savings that is:
a) the same as that provided by straight-line depreciation
b) greater than that provided by straight-line depreciation
c) less than that provided by straight-line depreciation
d) greater than that provided by any other depreciation method
Question 4: Acme Company, with pre-tax income of $80,000, is required to pay taxes of 25% on all income up to $20,000 and 35% on any income in excess of $20,000. Acme Company's average tax rate is:
a) 25.00%
b) 26.50%
c) 30.00%
d) 32.50%
Question 5: An accountant's main function in capital budgeting is to:
a) identify potential investments
b) choose which investments to make
c) gather and interpret information
d) All of these answers are correct.
Question 6: An asset with a book value of $320,000 is sold at a $240,000 pre-tax gain in a year when the tax rate is 40%. ________ is the tax effect of the gain.
a) A $144,000 cash outflow
b) A $656,000 cash outflow
c) A $224,000 cash outflow
d) A $96,000 cash outflow
Question 37: When evaluated using a nominal rate of 8%, the net present value of a project is zero. Identify which one of the following statements is true.
a) At 6% the project is desirable and at 8% it is undesirable.
b) At 8% the project is desirable and at 6% it is undesirable.
c) The project is desirable at 6% or 8%.
d) The project is undesirable at 6% or 8%.
Question 8: ________ is not another name for the required rate of return.
a) Hurdle rate
b) Discount rate
c) Compound rate
d) Cost of capital
Question 9: ________ does not require an explicit adjustment for inflation.
a) The nominal rate
b) The predicted operating cash flows
c) The tax effect of depreciation
d) None of these answers is correct.