Question

1.. When applying cash flows with discounting to business decisions, the calculation of annual net cash inflow
I. includes the cash inflow times 1 minus the tax rate
IL includes depreciation expense times 1 minus the tax rate
(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

.........

2.

The Truncale Company is planning a $210,000 equipment investment that has an estimated five-year life with no estimated salvage value. The present value of an annuity due for five years is 6.109. The company has projected the following annual cash flows for the investment:

Year Projected Cash Flows Present Value of $1

$120,000 0.91

2 $60,000 0.76

3 $40,000 0.63

4 $40,000 0.53

5 $40,000 0.44

Total $300,000 3.27

The net present value for this investment is

(A) ($3,800)

(B) $8,800

(C) $2,548

{D) ($800)

.......

3. Weiskoff Company is considering a project that yields annual net cash inflows of $430,000 for Years l through 5, and a net cash inflow of
$90,000 in Year 6. The project will require an initial investment of
$1,750,000. Weiskoff's cost of capital is 10 percent.
What is Weiskoff’s expected net present value for this project?
(A) $5,000
(B) ($69,900)
(C) $53,100
(D) None of the above

...............

4. Dean Inc. is investing in a machine with a three-year life. The machine is expected to reduce annual cash operating costs by $40,000 in each of the first two years and by $30,000 in the third year. Which of the following is/are correct?

I. To calculate the present value of the savings for Years 1 and 2, the

factor for the present value of an annuity of $1 for two periods is

used.

ll. To calculate the present value of the savings for Year 3, the factor for

the lump sum of a present value of $1 for three periods is required.

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

........................................

please explain answer.Tk.

Answer 1

1	The correct answer is the calculation of annual net cash inflow includes the cash inflow times 1 minus the tax rate
	Answer is A
	Depreciation expense times tax rate and not 1 minus the tax rate
2	Year	Cash flow	Discount factor	Present value
	0	-210000	1	-210000
	1	120000	0.91	109200
	2	60000	0.76	45600
	3	40000	0.63	25200
	4	40000	0.53	21200
	5	40000	0.44	17600
				8800
	The net present value for this investment is $8800. Therefore the answer is B
3	Year	Cash flow	Discount factor @ 10%	Present Value
	0	-1750000	1	-1750000
	1	430000	0.91	391300
	2	430000	0.83	356900
	3	430000	0.75	322500
	4	430000	0.68	292400
	5	430000	0.62	266600
	6	90000	0.56	50400
				-69900
	Weiskoff's expected net present value for this project is ($69900)
	The correct answer is B
4	The correct answer is A that is to calculate the present value of the savings for Years 1 and 2, the factor for the present value of an annuity of $1 for two periods is used. That is two years discount factor is added and multiplied by the benefit to get present value.