Question

1.On January 1, 2016 Crane Company will acquire a new asset that costs $400,000 and that is anticipated to have a salvage value of $30,000 at the end of four years. The new asset:

• qualifies as three-year property under the Modified Accelerated Cost Recovery System (MACRS)
• will replace an old asset that currently has a tax basis of $80,000 and that can be sold on this date for $60,000
• will continue to generate the same operating revenues as the old asset ($200,000 per year). However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $120,000 in each of the first three years, and $90,000 in the fourth year.

Crane is subject to a combined income tax rate of 40% and rounds all computations to the nearest dollar. Crane's fiscal year coincides with the calendar year. Assume that any gain or loss affects the taxes paid at the end of the year in which the gain or loss occurs. The company uses the net present value (NPV) method to analyze projects using the factors and rates presented below (based on a discount rate of 14%):

Period	PV of $1 at 14%	PV of $1 Annuity at 14%	MACRS
1	0.88	0.88	33%
2	0.77	1.65	45
3	0.68	2.33	15
4	0.59	2.92	7

The relevant discounted operating cash flows (cost savings) that should be factored into Crane Company's analysis are:

Select one:

a. $133,080

b. $150,780

c. $199,620

d. $206,640

e. $550,020

2.The internal rate of return (IRR) is the

Select one:

a. Rate of interest that equates the present value of after-tax cash outflows and the present value of after-tax cash inflows associated with a given project

b. Minimum acceptable rate of return for a proposed investment.

c. Risk-adjusted rate of return.

d. Required rate of return.

e. Weighted-average rate of return generated by internally generated funds.

3.There is always a current tax deduction for the firm for which of the following types of compensation?

Select one:

a. Qualified stock options

b. Nonqualified stock options

c. Deferred bonus

d. Current bonus

e. Performance shares

Answer 1

1]		0	1	2	3	4
	Savings in cash operating costs		$      1,20,000	$     1,20,000	$    1,20,000	$       90,000
	After tax savings in operating costs [Savings		$      72,000.0	$     72,000.0	$    72,000.0	$    54,000.0
	PVIF		0.88	0.77	0.68	0.59
	PV		$          63,360	$        55,440	$       48,960	$       31,860
	Discounted operating cash flows [savings]	$       1,99,620
	Answer: Option [c]
2]	a. Rate of interest that equates the present value of after-tax cash outflows and the present value of after-tax cash inflows associated with a given project
3]	d] Current bonus