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100.     A 5-year depreciation period usually means that:

a.     the company expects to use the asset for 5 years
     b.     the company will depreciate the asset over 5 years for tax purposes
     c.     the original cost of the asset will be recouped in 5 years
     d.     All of these answers are correct.

102.     Caribbean Corporation is considering the purchase of equipment for $360,000. The asset will have a 10-year life, no terminal salvage value, and straight-line depreciation will be used for tax purposes. It is expected that annual sales of the product manufactured by the equipment will be $180,000, and that there will be annual production costs, exclusive of depreciation, equal to $120,000. The tax rate applicable to the company is 30%. The annual net after-tax cash effect of operations, exclusive of depreciation, is a(n):

     a.     $18,000 inflow     
     b.     $18,000 outflow
     c.     $42,000 outflow     
d.     $42,000 inflow

     

103.     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

     

104.     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

105.     A company is considering the purchase of some equipment that in the second year of operation should cause an increase in sales of $150,000, an increase in cash expenses of $90,000, and a depreciation deduction of $45,000. If the appropriate tax rate is 40%, the after-tax effect of this equipment on cash flows in year two is:

     a.     no effect
     b.     net after-tax cash inflows of $54,000
     c.     net after-tax cash inflows of $9,000
     d.     net after-tax cash inflows of $15,000

 

106.     If the appropriate tax rate is 30%, the after-tax effect of a single depreciation deduction of $100,000 is a:

     a.     $70,000 net after-tax cash outflow
     b.     $70,000 net after-tax cash inflow
     c.     $30,000 net after-tax cash outflow
     d.     $30,000 net after-tax cash inflow

     
107.     If the appropriate tax rate is 30%, the after-tax effect of an $100,000 savings in labor cost is

     a.     $30,000 net after-tax cash outflow
     b.     $30,000 net after-tax cash inflow
     c.     $70,000 net after-tax cash outflow
     d.     $70,000 net after-tax cash inflow

     


108.     Bond Corporation is considering the purchase of an asset for $400,000. It is expected that the product manufactured by the equipment can be sold for $150,000 and there will be annual production costs, exclusive of depreciation, equal to $80,000. The asset will have a 10-year life, no terminal salvage value, and straight-line depreciation will be used for tax purposes. The tax rate applicable to the company is 30%. The total net annual after-tax effect on cash resulting from the investment is a:

     a.     $49,000 inflow     
     b.     $61,000 inflow
     c.     $12,000 inflow     
     d.     $21,000 inflow

     

109.     Matt Helm Corporation is considering the purchase of an asset for $400,000. It is expected that the product manufactured by the equipment can be sold for $150,000 and that there will be annual production costs, exclusive of depreciation, equal to $80,000. The asset will have a 10-year life, no terminal salvage value, and straight-line depreciation will be used for tax purposes. The tax rate applicable to Matt Helm Corporation is 30%. If the equipment is purchased, the total net after-tax effect on cash flows over the entire life of the investment is:

     a.     $610,000 inflow     
     b.     $210,000 outflow
     c.     $210,000 inflow     
d.     $90,000 inflow


110.     Sally Sweet Tooth Company will purchase a van for $50,000. The van’s depreciable life is 5 years with no terminal salvage value. Assume a tax rate of 40% and a required after-tax rate of return of 12%. The annual after-tax effect of depreciation, if the straight-line method is used for taxes, is a:

     a.     $6,000 outflow     
     b.     $6,000 inflow
     c.     $4,000 outflow     
d.     $4,000 inflow

     


111.     Sam Butcher Company will purchase a van for $40,000. It will have a depreciable life of 5 years and no terminal salvage value. Assume a tax rate of 40% and a required after-tax rate of return of 12%. The present value of the total after-tax savings from depreciation, if the straight-line method is used, is:

     a.     $11,535     
     b.     $16,000
     c.     $24,000     
     d.     $17,303

     

112.     Alice Maid Company will purchase a van for $40,000. It will have a depreciable life of 5 years and no terminal salvage value. Assume a tax rate of 40% and a required after-tax rate of return of 12%. The present value of the after-tax saving from depreciation in year 2, if an accelerated method is used (of twice the straight-line rate), is:

     a.     $2,551
     b.     $3,827
     c.     $6,378
     d.     None of these answers is correct.

     
LEARNING OBJECTIVE 6

113.     A five year MACRS asset which cost $50,000 with zero terminal value was sold at the end of its useful life for $20,000. The tax rate is 40%.


 

     a.     $58,000     
     b.     $62,000
     c.     $8,000     
     d.     $12,000

     
114.     An asset with a book value of $40,000 is sold at a loss (before taxes are considered) of $20,000. The applicable tax rate is 40%. The net after-tax cash effect of this transaction is a:

     a.     $20,000 cash inflow
     b.     $12,000 cash outflow
     c.     $48,000 cash inflow
     d.     $28,000 cash inflow

     
115.     An asset with a book value of $50,000 is sold at a loss (before taxes are considered) of $20,000. The applicable tax rate is 40%.


 

     a.     $8,000 cash inflow      
     b.     $8,000 cash outflow
     c.     $16,000 cash inflow      
     d.     $28,000 cash inflow

     

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