Chapter 13 Appendix C Student: ___________________________________________________________________________ 1. The reduction in taxes made possible by the annual depreciation deductions equals the depreciation deduction multiplied by the tax rate. True False 2. The release of working capital at the end of an investment project is a taxable cash inflow. True False 3. Not all cash inflows are taxable. True False 4. When a company invests in equipment, it gets to immediately expense the cost of the equipment on the company's tax reports. True False 5. In an equipment selection capital budgeting decision, which of the following will increase the present value of the tax savings from the annual depreciation deductions? A. an increase in the cost of capital. B. an increase in the tax rate. C. an increase in the salvage value of the equipment. D. a decrease in the cost of new equipment. 6. Depreciation expense reduces income taxes by an amount equal to: A. one minus the tax rate times the amount of deprecation. B. the tax rate times the amount of depreciation. C. the amount of the depreciation. D. one minus the amount of depreciation. 7. The after-tax cost of a deductible cash expense is: A. The amount of the cash expense. B. The amount of the cash expense times the tax rate. C. The amount of the cash expense times 1 minus the tax rate. D. Zero. 8. 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: A. $37,500 B. $60,000 C. $22,500 D. $52,500 9. A company anticipates a taxable cash receipt 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 this future cash flow is closest to: A. $17,355 B. $7,438 C. $9,000 D. $21,000 10. 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: A. $6,000 B. $9,000 C. $2,160 D. $1,440 11. Ring Corporation uses a discount rate of 12% and has a tax rate of 30%. The following cash flows occur in the third year of an equipment selection investment project: The total after-tax present value of the cash flows is closest to: A. $10,152 B. $34,603 C. $60,235 D. $79,459 12. 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: A. $256,000 B. $242,000 C. $250,000 D. $245,000 13. A company needs an increase in working capital of $10,000 in a 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: A. $7,350 B. $3,000 C. $7,000 D. $5,145 14. The Dill and Gherkin Law Firm is contemplating the decision to open up a branch office across town. The firm would sign a 5-year lease for a fully furnished office for $24,000 per year. The lease also requires a $30,000 security deposit upon signing. This deposit will be given back at the end of the 5-year lease term. No other amounts will need to be invested. However, additional operating costs are expected to be $65,000 per year for the 5 years. The firm expects to generate an additional $100,000 of revenue per year for the 5 years from the branch office. The firm's after-tax cost of capital is 16% and its tax rate is 30%. The net present value of this investment project is closest to: A. $(509) B. $5,206 C. $9,490 D. $14,206 15. A company anticipates a taxable cash expense of $80,000 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: A. $(56,000) B. $(19,835) C. $(46,281) D. $(24,000) 16. 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: A. $700,000 B. $250,000 C. $162,500 D. $87,500 17. Last year the sales at Summit Company were $400,000 and were all cash sales. The expenses at Summit were $250,000 and were all cash expenses. The tax rate was 40%. The after-tax net cash inflow at Summit last year was: A. $150,000 B. $60,000 C. $90,000 D. $400,000 18. 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: A. $12,000 B. $4,200 C. $8,000 D. $2,800 19. A company anticipates a depreciation deduction of $20,000 in year 3 of a project. The company's tax rate is 30% and its discount rate is 14%. The present value of the annual depreciation deductions resulting from this deduction is closest to: A. $9,450 B. $14,000 C. $6,000 D. $4,050 Burry Inc. has provided the following data to be used in evaluating a proposed investment project: For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 5 years. The company uses a discount rate of 11%. 20. When computing the net present value of the project, what are the annual after-tax cash receipts? A. $338,000 B. $168,900 C. $394,100 D. $67,500 21. When computing the net present value of the project, what are the annual after-tax cash expenses? A. $235,000 B. $217,000 C. $93,000 D. $403,000 22. By how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken? A. $45,000 B. $75,000 C. $105,000 D. $32,143 23. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year? A. $22,500 B. $75,000 C. $52,500 D. $0 24. The net present value of the project is closest to: A. $250,815 B. $84,495 C. $109,800 D. $276,120 Jenny Inc. has provided the following data concerning an investment project that has been proposed: The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 14%. 25. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year? A. $0 B. $31,500 C. $45,000 D. $13,500 26. The net present value of the project is closest to: A. $227,071 B. $58,113 C. $241,435 D. $43,749 Michelotti Inc. is considering an investment project that would require an initial investment of $140,000 and that would last for 7 years. The annual cash receipts from the project would be $105,000 and the annual cash expenses would be $47,000. The equipment used in the project could be sold at the end of the project for a salvage value of $7,000. The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 19%. 27. When computing the net present value of the project, what are the annual after-tax cash receipts? A. $73,500 B. $77,000 C. $58,000 D. $31,500 28. The net present value of the project is closest to: A. $11,914 B. $37,601 C. $10,464 D. $34,151 Morgado Inc. has provided the following data to be used in evaluating a proposed investment project: The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 19%. 29. When computing the net present value of the project, what are the annual after-tax cash receipts? A. $39,000 B. $13,650 C. $54,600 D. $23,400 30. When computing the net present value of the project, what are the annual after-tax cash expenses? A. $12,900 B. $30,100 C. $55,900 D. $30,000 31. By how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken? A. $6,500 B. $15,167 C. $18,200 D. $7,800 32. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year? A. $9,100 B. $3,900 C. $13,000 D. $0 33. Sarafin Inc. is considering a project that would require an initial investment of $693,000 and would have a useful life of 7 years. The annual cash receipts would be $416,000 and the annual cash expenses would be $208,000. The salvage value of the assets used in the project would be $35,000. The company's tax rate is 30%. For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 5 years. The company uses a discount rate of 15%. Required: Compute the net present value of the project. 34. Management is considering purchasing an asset for $30,000 that would have a useful life of 5 years and no salvage value. For tax purposes, the entire original cost of the asset would be depreciated over 5 years using the straight-line method. The asset would generate annual net cash inflows of $21,000 throughout its useful life. The project would require additional working capital of $4,000, which would be released at the end of the project. The company's tax rate is 40% and its discount rate is 8%. Required: What is the net present value of the asset? 35. A company is considering purchasing an asset for $50,000 that would have a useful life of 8 years and would have a salvage value of $5,000. For tax purposes, the entire original cost of the asset would be depreciated over 8 years using the straight-line method and the salvage value would be ignored. The asset would generate annual net cash inflows of $26,000 throughout its useful life. The project would require additional working capital of $8,000, which would be released at the end of the project. The company's tax rate is 40% and its discount rate is 13%. Required: What is the net present value of the asset? 36. Eisenbeis Inc. has provided the following data concerning a proposed investment project: The company's tax rate is 30%. For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 7 years. The company uses a discount rate of 13%. Required: Compute the net present value of the project. Chapter 13 Appendix C Key 1. The reduction in taxes made possible by the annual depreciation deductions equals the depreciation deduction multiplied by the tax rate. TRUE AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Comprehension Garrison - Chapter 13 #1 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 2. The release of working capital at the end of an investment project is a taxable cash inflow. FALSE AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Comprehension Garrison - Chapter 13 #2 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 3. Not all cash inflows are taxable. TRUE AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Comprehension Garrison - Chapter 13 #3 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 4. When a company invests in equipment, it gets to immediately expense the cost of the equipment on the company's tax reports. FALSE AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Knowledge Garrison - Chapter 13 #4 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Easy 5. In an equipment selection capital budgeting decision, which of the following will increase the present value of the tax savings from the annual depreciation deductions? A. an increase in the cost of capital. B. an increase in the tax rate. C. an increase in the salvage value of the equipment. D. a decrease in the cost of new equipment. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Comprehension Garrison - Chapter 13 #5 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 6. Depreciation expense reduces income taxes by an amount equal to: A. one minus the tax rate times the amount of deprecation. B. the tax rate times the amount of depreciation. C. the amount of the depreciation. D. one minus the amount of depreciation. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Knowledge Garrison - Chapter 13 #6 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Easy Source: CMA, adapted 7. The after-tax cost of a deductible cash expense is: A. The amount of the cash expense. B. The amount of the cash expense times the tax rate. C. The amount of the cash expense times 1 minus the tax rate. D. Zero. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Comprehension Garrison - Chapter 13 #7 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 8. 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: A. $37,500 B. $60,000 C. $22,500 D. $52,500 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #8 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Easy 9. A company anticipates a taxable cash receipt 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 this future cash flow is closest to: A. $17,355 B. $7,438 C. $9,000 D. $21,000 The answer without rounding error is $17,355. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #9 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 10. 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: A. $6,000 B. $9,000 C. $2,160 D. $1,440 After-tax cost = (1 - Tax rate) Tax-deductible cash expense $3,600 = (1 - 0.40) Tax-deductible cash expense Tax deductible cash expense = $3,600 0.60 = $6,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #10 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Hard 11. Ring Corporation uses a discount rate of 12% and has a tax rate of 30%. The following cash flows occur in the third year of an equipment selection investment project: The total after-tax present value of the cash flows is closest to: A. $10,152 B. $34,603 C. $60,235 D. $79,459 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #11 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 12. 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: A. $256,000 B. $242,000 C. $250,000 D. $245,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #12 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium Source: CMA, adapted 13. A company needs an increase in working capital of $10,000 in a 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: A. $7,350 B. $3,000 C. $7,000 D. $5,145 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #13 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 14. The Dill and Gherkin Law Firm is contemplating the decision to open up a branch office across town. The firm would sign a 5-year lease for a fully furnished office for $24,000 per year. The lease also requires a $30,000 security deposit upon signing. This deposit will be given back at the end of the 5-year lease term. No other amounts will need to be invested. However, additional operating costs are expected to be $65,000 per year for the 5 years. The firm expects to generate an additional $100,000 of revenue per year for the 5 years from the branch office. The firm's after-tax cost of capital is 16% and its tax rate is 30%. The net present value of this investment project is closest to: A. $(509) B. $5,206 C. $9,490 D. $14,206 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #14 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 15. A company anticipates a taxable cash expense of $80,000 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: A. $(56,000) B. $(19,835) C. $(46,281) D. $(24,000) The exact answer without rounding is $(46,281). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #15 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 16. 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: A. $700,000 B. $250,000 C. $162,500 D. $87,500 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #16 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Easy 17. Last year the sales at Summit Company were $400,000 and were all cash sales. The expenses at Summit were $250,000 and were all cash expenses. The tax rate was 40%. The after-tax net cash inflow at Summit last year was: A. $150,000 B. $60,000 C. $90,000 D. $400,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #17 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Easy 18. 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: A. $12,000 B. $4,200 C. $8,000 D. $2,800 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #18 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Easy 19. A company anticipates a depreciation deduction of $20,000 in year 3 of a project. The company's tax rate is 30% and its discount rate is 14%. The present value of the annual depreciation deductions resulting from this deduction is closest to: A. $9,450 B. $14,000 C. $6,000 D. $4,050 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #19 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium Burry Inc. has provided the following data to be used in evaluating a proposed investment project: For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 5 years. The company uses a discount rate of 11%. Garrison - Chapter 13 20. When computing the net present value of the project, what are the annual after-tax cash receipts? A. $338,000 B. $168,900 C. $394,100 D. $67,500 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #20 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 21. When computing the net present value of the project, what are the annual after-tax cash expenses? A. $235,000 B. $217,000 C. $93,000 D. $403,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #21 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 22. By how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken? A. $45,000 B. $75,000 C. $105,000 D. $32,143 Tax savings from the depreciation tax shield = Tax rate Depreciation deduction = 0.30 $150,000 = $45,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #22 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 23. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year? A. $22,500 B. $75,000 C. $52,500 D. $0 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #23 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 24. The net present value of the project is closest to: A. $250,815 B. $84,495 C. $109,800 D. $276,120 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #24 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium Jenny Inc. has provided the following data concerning an investment project that has been proposed: The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 14%. Garrison - Chapter 13 25. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year? A. $0 B. $31,500 C. $45,000 D. $13,500 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #25 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 26. The net present value of the project is closest to: A. $227,071 B. $58,113 C. $241,435 D. $43,749 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #26 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium Michelotti Inc. is considering an investment project that would require an initial investment of $140,000 and that would last for 7 years. The annual cash receipts from the project would be $105,000 and the annual cash expenses would be $47,000. The equipment used in the project could be sold at the end of the project for a salvage value of $7,000. The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 19%. Garrison - Chapter 13 27. When computing the net present value of the project, what are the annual after-tax cash receipts? A. $73,500 B. $77,000 C. $58,000 D. $31,500 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #27 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 28. The net present value of the project is closest to: A. $11,914 B. $37,601 C. $10,464 D. $34,151 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #28 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium Morgado Inc. has provided the following data to be used in evaluating a proposed investment project: The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 19%. Garrison - Chapter 13 29. When computing the net present value of the project, what are the annual after-tax cash receipts? A. $39,000 B. $13,650 C. $54,600 D. $23,400 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #29 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 30. When computing the net present value of the project, what are the annual after-tax cash expenses? A. $12,900 B. $30,100 C. $55,900 D. $30,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #30 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 31. By how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken? A. $6,500 B. $15,167 C. $18,200 D. $7,800 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #31 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 32. When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year? A. $9,100 B. $3,900 C. $13,000 D. $0 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #32 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 33. Sarafin Inc. is considering a project that would require an initial investment of $693,000 and would have a useful life of 7 years. The annual cash receipts would be $416,000 and the annual cash expenses would be $208,000. The salvage value of the assets used in the project would be $35,000. The company's tax rate is 30%. For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 5 years. The company uses a discount rate of 15%. Required: Compute the net present value of the project. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #33 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 34. Management is considering purchasing an asset for $30,000 that would have a useful life of 5 years and no salvage value. For tax purposes, the entire original cost of the asset would be depreciated over 5 years using the straight-line method. The asset would generate annual net cash inflows of $21,000 throughout its useful life. The project would require additional working capital of $4,000, which would be released at the end of the project. The company's tax rate is 40% and its discount rate is 8%. Required: What is the net present value of the asset? AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #34 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 35. A company is considering purchasing an asset for $50,000 that would have a useful life of 8 years and would have a salvage value of $5,000. For tax purposes, the entire original cost of the asset would be depreciated over 8 years using the straight-line method and the salvage value would be ignored. The asset would generate annual net cash inflows of $26,000 throughout its useful life. The project would require additional working capital of $8,000, which would be released at the end of the project. The company's tax rate is 40% and its discount rate is 13%. Required: What is the net present value of the asset? AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #35 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium 36. Eisenbeis Inc. has provided the following data concerning a proposed investment project: The company's tax rate is 30%. For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 7 years. The company uses a discount rate of 13%. Required: Compute the net present value of the project. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Application Garrison - Chapter 13 #36 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis Level: Medium Chapter 13 Appendix C Summary Category # of Questions AACSB: Analytic 29 AACSB: Reflective Thinking 7 AICPA BB: Critical Thinking 36 AICPA FN: Measurement 36 Blooms: Application 29 Blooms: Comprehension 5 Blooms: Knowledge 2 Garrison - Chapter 13 40 Learning Objective: 13C-08 Include income taxes in a capital budgeting analysis 36 Level: Easy 6 Level: Hard 1 Level: Medium 29 Source: CMA, adapted 2