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 Fundamentals of Financial Summary of Results
Management, twelfth edition
 !"  of 20 Scored items:
  
 Fundamentals of Financial
5 Correct: 25%
Management, twelfth edition
15 Incorrect: 75%
  Van Horne/Wachowicz

 
 More information about scoring

    Student Resources > Chapter 12

 
 > Multiple choice questions
  July 27, 2010 at 1:56 AM (EDT)

 


#$ In proper capital budgeting analysis we evaluate incremental

__________ cash flows.

c
%
accounting
" %
operating


We want to examine after-tax incremental ‘
cash flows.

$ The estimated benefits from a capital budgeting project are expected as
cash flows rather than income flows because __________.

c
%
it is more difficult to calculate income flows than cash
flows
" %
it is cash, not accounting income, that is central to
the firm's capital budgeting decision 

Forecasted income flows are calculated from the forecasted income

statement and are not anymore difficult to calculate than cash flows.

X$ What is the depreciable basis?

 c
%
It is the cost of all items expended prior to the
decision to accept a project and are added to the cost
of the asset and written off for tax purposes.
" %
It is the fully installed cost of an asset that taxing
authorities allow to be written off for tax purposes. 

It is the fully installed cost of an asset that taxing authorities allow to be

written off for tax purposes.

†$ In estimating "after-tax incremental operating cash flows" for a project,

you should include all of the following

 __________.

c
%
the amount (net of taxes) that we could realize from
selling a currently unused building of ours that we
intend to use for our project
" %
costs that have previously been incurred that are
unrecoverable 

This is related to opportunity costs that exist that we want to consider

when evaluating a project.

$ All of the following influence capital budgeting cash flows



__________.

c
%
sunk costs of the project

&$ The basic capital budgeting principles involved in determining relevant

after-tax incremental operating cash flows require us to __________.

c
%
include opportunity costs, but ignore sunk costs

'$ Place the following items in the proper order of completion regarding the
capital budgeting process. I. Perform a postaudit for completed projects;
II. Generate project proposals; III. Estimate appropriate cash flows; IV.
Select value-maximizing projects; V. Evaluate projects.

c
%
II, V, III, IV, and I.
" %
II, III, V, IV, and I. 

Ë$ The basic capital budgeting principles involved in determining relevant

 after-tax incremental operating cash flows require us to __________.

c
%
include effects of inflation, but ignore project-driven
changes in working capital net of spontaneous
changes in current liabilities
" %
include effects of inflation, and include project-driven
changes in working capital net of spontaneous

changes in current liabilities

We would include effects of inflation, and also include project-driven

changes in working capital net of spontaneous changes in current
liabilities.

â$ Interest payments, principal payments, and cash dividends are

__________ the typical budgeting cash-flow analysis because they are
________ flows.

c
%
excluded from; financing

#($ What is an example of a capitalized expenditure?

c
%
Funds spent last year to renovate a building that
could be used to house a new project that is
currently being evaluated.
" %
Installation costs necessary to use a machine that
was just purchased. 

This is a sunk cost.

##$ In regards to the sale or disposal of a depreciable asset, "recapture of

depreciation" is __________.

c
%
any amount realized in excess of its depreciated (tax)
book value, but less than its original depreciable basis

#$ For a corporation, what is the maximum federal tax that applies to any
gains on the sale of a depreciable asset above its depreciable basis?

c
%
Ah hah! You can't fool me! This so-called gain is not
taxed and is considered tax-free.
" %
35%.

 The maximum rate is 35%.

#X$ Under the MACRS system, and employing the half-year convention, a
piece of machinery falling in the 10-year property class would generally
be depreciated over __________.

c
%
10.5 recovery years
" %
11 recovery years


The correct answer is 11 recovery years. (This is similar to asking -- How

many member schools in the "Big Ten Conference"? And, as collegiate
sports fans know, the answer is eleven.)

#†$ Which of the following is ?


?
? to be part of the calculation of the

 ?

 

?
 
?‘ for an energy-related expansion
project?

c
%
Salvage value of any sold or disposed assets.
" %
Capitalized expenditures.


These are potential project windup flows.

# $ HeinShmidt Wines.com is considering the purchase of a new project with

a four-year life. The depreciable basis is $100,000 and requires $20,000
of additional working capital. The project will generate $87,000 of
additional revenue with $50,000 of additional operating expenses for
each year of the four-year project. For tax purposes, the equipment falls
into the three-year property class using MACRS percentages. The
company is subject to a marginal tax rate of 40%. The salvage value at
the end of the fourth year is expected to be $5,000. The incremental net
cash flow for the 

 of the project is closest to which of the four
suggested answers below?

c
%
$30,798
" %
$35,532


($87,000 - $50,000 - $33,330) x (1-.40) + $33,330 = $35,532. Note

that the depreciation charge is 33.33% of $100,000.

#&$ HeinShmidt Wines.com is considering the purchase of a new project with

a four-year life. The depreciable basis is $100,000 and requires $20,000
of additional working capital. The project will generate $87,000 of
additional revenue with $50,000 of additional operating expenses for
 each year of the four-year project. For tax purposes, the equipment falls
into the three-year property class using MACRS percentages. The
company is subject to a marginal tax rate of 40%. The salvage value at
the end of the fourth year is expected to be $5,000. When we determine
the project's terminal year incremental net cash flow, i.e., the flow for
year 4, we apply the same step-by-step procedure for this period's cash
flow as we do to those in all the interim periods. In addition, we give
special recognition to a few cash flows that are connected with project
termination. The 

 (i.e., the sum of just those flows connected
with project termination) that needs to be made to the incremental net
cash flow for the ‘
 of the project is closest to which of the four
suggested answers below?

c
%
$49,466
" %
$23,000


($5,000 - $2,000 + $20,000) = $23,000. Note that the salvage value is

considered as recapturing previous depreciation and will increase taxes
by 40% of the salvage value.

#'$ HeinShmidt Wines.com is considering the purchase of a new project with

a four-year life. The depreciable basis is $100,000 and requires $20,000
of additional working capital. The project will generate $87,000 of
additional revenue with $50,000 of additional operating expenses for
each year of the four-year project. For tax purposes, the equipment falls
into the three-year property class using MACRS percentages. The
company is subject to a marginal tax rate of 40%. The salvage value at
the end of the fourth year is expected to be $5,000. The ? 

‘?‘ for the project is closest to which of the four suggested answers
below?

c
%
$120,000

#Ë$ HeinShmidt Wines.com is considering the purchase of a new project with

a four-year life. The depreciable basis is $100,000 and requires $20,000
of additional working capital. The project will generate $87,000 of
additional revenue with $50,000 of additional operating expenses for
each year of the four-year project. For tax purposes, the equipment falls
into the three-year property class using MACRS percentages. The
company is subject to a marginal tax rate of 40%. The salvage value at
the end of the fourth year is expected to be $5,000. The incremental net
cash flow for the

‘
 of the project is closest to which of the four
suggested answers below?

c
%
$9,720
" %
$39,980


($87,000 - $50,000 - $44,450) x (1 - .40) + $44,450 = $39,980. Note

 that the depreciation charge is 44.45% of $100,000 and we assume that
the "tax loss" shields other income in the firm.

#â$ Bruggerstein Auto.com is considering replacing a machine with a new

machine that has a four-year life. The depreciable basis of the "new"
machine is $100,000 ($80,000 cost plus $20,000 shipping and
installation) and requires no additional working capital. The "old"
machine can be salvaged for $20,000 (at its current {tax} book value)
today. The "new" project will not generate additional revenues, but will
decrease operating expenses by $35,000 for each year of the four-year
project. For tax purposes, the equipment falls into the three-year
property class using MACRS percentages. The "old" machine has four
years of useful life remaining, only one year of tax depreciation of $5,000
remaining to be taken, and an estimated final salvage value, four years
from now, of zero. The company is subject to a marginal tax rate of
40%. The salvage value at the end of the fourth year for the "new"
project is expected to be $5,000. The incremental net cash flow for the


of the project is closest to which of the four suggested answers
below?

c
%
$28,330
" %
$32,332


[ $35,000 - ($33,330 - $5,000) ] x [1- .40] + $28,330 = $32,332.

($ Bruggerstein Auto.com is considering replacing a machine with a new

machine that has a four-year life. The depreciable basis of the "new"
machine is $100,000 ($80,000 cost plus $20,000 shipping and
installation) and requires no additional working capital. The "old"
machine can be salvaged for $20,000 (at its current {tax} book value)
today. The "new" project will not generate additional revenues, but will
decrease operating expenses by $35,000 for each year of the four-year
project. For tax purposes, the equipment falls into the three-year
property class using MACRS percentages. The "old" machine has four
years of useful life remaining, only one year of tax depreciation of $5,000
remaining to be taken, and an estimated final salvage value, four years
from now, of zero. The company is subject to a marginal tax rate of
40%. The salvage value at the end of the fourth year for the "new"
project is expected to be $5,000. The ? 
‘?‘ for the project
is closest to which of the four suggested answers below?

c
%
$120,000
" %
$80,000


[ $80,000 + $20,000 - $20,000 + $0 ] = $80,000.