Category: Uncategorized

You purchased and put in use an asset with useful life of 5 years under MACRS depreciation system. For how many years will you record depreciation expense for this asset?

Which of the following statements regarding capital investment analysis is FALSE?

The [term1] [term2] of return is the estimated rate (i.e., percentage) that makes the discounted present value of future cash flows equal to the initial investment (2 words, 1 point for each word, up to 2 points).

If the after-tax cost of debt is 10%, what is the approximate pre-tax cost for a firm in the 40% tax bracket?

The following table relates to two capital-budgeting projects of equal risk and reports the present value of the cashflows in the relevant periods. Which of the projects has the higher Net Present Value and will be selected if Net Present Value is used as the selection criteria?

A depreciation tax [term1] is a tax reduction technique under which depreciation expense is subtracted from taxable income. This amount is calculated as the applicable tax rate, multiplied by the amount of depreciation (1 point).

Repeated for your convenience: Marc Corporation wants to purchase a new machine for $400,000. Management predicts that the machine will produce cash sales of $275,000 each year for the next 5 years. Cash expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The company uses MACRS for depreciation. The machine is considered as a 3-year property and is not expected to have any significant residual value at the end of its useful years. Marc’s combined marginal income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments. A partial MACRS depreciation table is reproduced below. What is the TOTAL after-tax cash inflow in Year 1 from the proposed investment (rounded to the nearest thousand)?

The [term1] analysis is the widely used approach that managers use to recognize uncertainty about results of any models and to obtain an immediate financial estimate of the financial consequences of possible prediction errors due to the variance in the model factors/inputs. In the context of capital budgeting this means evaluating how sensitive are the capital budgeting decisions to various inputs such as tax rate, discount rate or timing of the cashflows (2 words, 1 point for each word, up to 2 points). (Hint: use the broadest term from the textbook that unites all potential techniques under this umbrella).

An asset “Equipment 1” has a net book value of $ 19,000 at the moment of sale. What are the after-tax proceeds (i.e., after-tax cash flow) for a firm in the 27 % marginal tax bracket if this asset is sold for $ 15,000 cash?

What is the name of the function that is included in “What-if” sensitivity analysis in Excel that allows calculating the targeted value (e.g., Net Present Value in our case) when two of the inputs into the model change simultaneously (e.g., tax rate and discount rate in the example from lectures)?