Question

1.      A company anticipates a depreciation deduction of $70,000 in year 4 of a project. The company's tax rate is 40% and its discount rate is 12%. The present value of the depreciation tax shield resulting from this deduction is closest to:

          A)     $17,808

          B)     $29,000

          C)     $21,000

          D)     $13,356

2.      (Ignore income taxes in this problem.) Nevland Corporation is considering the purchase of a machine that would cost $120,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $18,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $43,000. The company requires a minimum pretax return of 19% on all investment projects. The net present value of the proposed project is closest to:

          A)     $32,966

          B)     $26,376

          C)     $64,902

          D)     $30,040

3.      (Ignore income taxes in this problem) The management of Elamin Corporation is considering the purchase of a machine that would cost $305,745 and would have a useful life of 9 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $51,000 per year. The internal rate of return on the investment in the new machine is closest to:

          A)     9%

          B)     11%

          C)     12%

          D)     10%

4.      (Ignore income taxes in this problem.) The management of Solar Corporation is considering the following three investment projects:

         

		Project L	Project M	Project N
	Investment required.......................	$37,000	$55,000	$82,000
	Present value of cash inflows........	$39,480	$60,150	$90,200

          Rank the projects according to the profitability index, from most profitable to least profitable.

          A)     M,N,L

          B)     L,N,M

          C)     N,L,M

          D)     N,M,L

5.      (Ignore income taxes in this problem.) The management of Lanzilotta Corporation is considering a project that would require an investment of $368,600 and would last for 8 years. The annual net operating income from the project would be $66,000, which includes depreciation of $31,000. The scrap value of the project's assets at the end of the project would be $15,000. The payback period of the project is closest to:

          A)     3.8 years

          B)     2.6 years

          C)     2.7 years

          D)     4.0 years

6.      Dunn Construction, Inc., has a large crane that cost $35,000 when purchased ten years ago. Depreciation taken to date totals $25,000. The crane can be sold now for $8,000. Assuming a tax rate of 40%, if the crane is sold the total after-tax cash inflow for capital budgeting purposes will be:

          A)     $7,400

          B)     $10,000

          C)     $8,800

          D)     $8,000

Answer 1

Q1.
Answer is A. $ 17808
Explanation:
Annual depreciation				70000
Tax benefit of depreciation				28000
Present value factor fr 4 year at 12%				0.63552
Present value of Tax shield of depreciation				17794.56
Q2.
Answer is A. $ 32966
Explanation:
Annual cost saving				43000
Annuity factor for 6 years at 19%				3.4098
Present value of cash inflows				146621.4
Add: Present value of salavage				6337.8
(18000*0.3521)
Present value of inflows				152959.2
Less: Initial investment				120,000
Net present value				32959
Q3.
Answer is A. 9%
Explanation:
Annual inflows				51000
Annuity factor for 9 years at 9%				5.995
Preesent value of inflows				305745
Less: Initial investment				305745
NPV				0
Hence, IRR is 9%
Q4.
Answer is D. NML
Explanation:
			Project L	Project M	Project N
Presennt value of inflows			39480	60150	90200
Divide: Initial Investment			37000	55000	82000
Profitability Index			1.07	1.09	1.10
Q5.
Answer is A. 3.8 years
Explanation:
Annual inflows: 66000+31000 = 97000
Payback period: Initial investmennt/ Annual inflows
		368600/97000 = 3.80 years
Q6.
Answer is C. $ 8800
Eexplanation:
Sales price			8000
Add: tax benefit on Loss			800
(35000-25000-8000)*40%
Cash inflow for sale			8800