MULTIPLE-CHOICE QUESTIONS are designed to test general understanding of a variet

Question

MULTIPLE-CHOICE QUESTIONS are designed to test general understanding of a variety of concepts, as well as knowledge of various specific points.


1. Which of the following project would likely have the least (if any) effect on net working capital?
____
A) Start up of a baseball manufacturing plant
B) Setting up retail outlets to sell your own manufactured products that you have previously wholesales to others
C) Doubling the size of your retail floor space in order to accommodate new product lines
D) Converting a manufacturing process from manual labor to automatic production
E) Using long-term bank credit to reduce payables enabling you to better take advantage of trade discounts


2. Consider the following data for a new capital project: equipment cost of $10,000, installation of equipment at $1,000, and inventory of spares with $2,000. Also, this project will use a freezer that cost $5,000 to install 5 years ago, with no alternative use now, having a zero market value. The initial investment outlay of the new project is
____
A) $18,000
B) $13,000
C) $12,000
D) $11,000
E) $10,000


3. Your company currently sells standard tennis rackets. The board of directors wants you to look at introducing a new line of oversized rackets. Which of the following are irrelevant costs?
____
A) $100,000 spent on R&D last year on oversized rackets
B) $300,000 drop in sales of standard size rackets when the oversized are introduced
C) Land the company already owns, but which may be used for this project, has a market value of $700,000
D) All of the above
E) None of the above



(The following information relates to Questions 4 and 5)

A firm in the 40% corporate tax bracket has two asset pools. There is no other asset left in Pool B after the sale.

Asset Pool A Asset Pool B
Existing un-depreciated capital cost (UCC) $150 $350

Assets sold
Original cost $400 $100
Proceeds from sales $450 $300


4. What is the CCA recapture for Pool A and its total tax liability, if any?
____
A) $100; $0
B) $250; $100
C) $300; $180
D) $300; $50
E) $250; $110


5. How much is the terminal loss for Pool B?
____
A) $250
B) $200
C) $100
D) $50
E) Undetermined


6. Given the depreciable base C0 = $250, CCA rate d = 20%, corporate tax rate Tc = 40%, and year 2 project operating income (S

Explanation / Answer

1. Which of the following project would likely have the least (if any) effect on net working capital?
____
A) Start up of a baseball manufacturing plant
B) Setting up retail outlets to sell your own manufactured products that you have previously wholesales to others
C) Doubling the size of your retail floor space in order to accommodate new product lines
D) Converting a manufacturing process from manual labor to automatic production
E) Using long-term bank credit to reduce payables enabling you to better take advantage of trade discounts


2. Consider the following data for a new capital project: equipment cost of $10,000, installation of equipment at $1,000, and inventory of spares with $2,000. Also, this project will use a freezer that cost $5,000 to install 5 years ago, with no alternative use now, having a zero market value. The initial investment outlay of the new project is
____
A) $18,000
B) $13,000
C) $12,000
D) $11,000
E) $10,000


3. Your company currently sells standard tennis rackets. The board of directors wants you to look at introducing a new line of oversized rackets. Which of the following are irrelevant costs?
____
A) $100,000 spent on R&D last year on oversized rackets
B) $300,000 drop in sales of standard size rackets when the oversized are introduced
C) Land the company already owns, but which may be used for this project, has a market value of $700,000
D) All of the above
E) None of the above



(The following information relates to Questions 4 and 5)

A firm in the 40% corporate tax bracket has two asset pools. There is no other asset left in Pool B after the sale.

Asset Pool A Asset Pool B
Existing un-depreciated capital cost (UCC) $150 $350

Assets sold
Original cost $400 $100
Proceeds from sales $450 $300


4. What is the CCA recapture for Pool A and its total tax liability, if any?
____
A) $100; $0
B) $250; $100
C) $300; $180
D) $300; $50
E) $250; $110


5. How much is the terminal loss for Pool B?
____
A) $250
B) $200
C) $100
D) $50
E) Undetermined


6. Given the depreciable base C0 = $250, CCA rate d = 20%, corporate tax rate Tc = 40%, and year 2 project operating income (S – C) = $150, estimate the operating cash flow (OCF) at the end of year 2. The half-year rule applies when calculating the CCA deduction.
____
A) $250
B) $190
C) $108
D) $90
E) None of the above
Hint: OCFt = (St – Ct)(1 – Tc) (CCAt)(Tc)



(The following information relates to Questions 7 to 9)

You are considering an investment in a process that promises to save you $75 every year. This process has an economic life of four years with a cost of $100. Such a capital cost is depreciated to zero with the straight-line method. Assume a 34% corporate tax rate and a discount rate of 10%.


7. What is the value of tax shields in each period that arises from the investment in this process?
____
A) $16.50
B) $26.95
C) $34.00
D) $8.50
E) None of the above

8. What is the (total) annual operating cash flow over the life of the project?
____
A) $49.50
B) $58.00
C) $75.00
D) $83.50
Hint:

9. What is the NPV of the investment in this process?
____
A) $62.25
B) $83.85
C) $114.50
D) $132.00
Hint:


10. Which of the following will NOT decrease the present value of the CCA tax shields associated with a capital investment project?
____
A) A decrease in the corporate tax rate
B) An increase in the discount rate
C) A decrease in the CCA rate
D) All of the above
E) None of the above

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