Q1- Identify the items that will be ignored when estimating the after tax cash flows of the project.
I) cash flow from sales
II) financing charges
III) depreciation
IV) loss on sale of the asset
V) residual cash flow
VI) investment allowance
Ans
a- residual cash flow and investment allowance
b- financing charges and depreciation
c- financing charges
d- loss on sale of the asset and residual cash flow
e- loss on sale of the asset and investment allowance
Q2- Use the following information to estimate the taxable income for year 2.
Year Sales in units
1 10,000
2 20,000
3 40,000
4 45,000
5 40,000
6 25,000
Unit price for sales in years 1 to 3: $50 and for years 4 to 6: $45
VC : $25 per unit
FC : $50 000 per year
Initial Investment: $600 000
Salvage: $50 000 at the end of year 6
tax rate: 34%
cost of capital 15%
depreciation method: prime cost to zero
Ans
a- $305 000
b- $300 000
c- $350 000
d- $250 000
e- $400 000
Q3- Which of the following is correct:
Ans
a- The depreciation tax shield for a period is caclulated as D x T, where D = the amount of depreciation and T equals the tax rate.
b- The after tax cash flow from cash revenue in any period is R x (1-T), where R equals revenue and T equals the tax rate.
c- The after tax cash flow of cash expense in any period is E x (1-T), where E equals cash expense and T equals the tax rate.
d- The tax savings from an investment allowance is equal to I x T x A, where I equals the amount of eligible capital expenditure, A the rate of investment allowance and T equals the tax rate.
e- All of the options given are correct.
Q4- A Loss on Sale occurs when:
Ans
a- Initial Cost minus Accumulated Depreciation > Salvage Value
b- Salvage Value is zero.
c- Salvage Value > Depreciation in the last year
d- Salvage Value < Depreciation in the last year
e- SV > Written Down Value
Q5- When replacing Project A with Project B the incremental impact on the depreciation deduction is given by:
Answer
a- Depreciation of Project B only is deducted. Project A's depreciation can be ignored because it is being replaced.
b- Depreciation Of Project A plus Depreciation of Project B
c- Depreciation Of Project A divided by Depreciation of Project B.
d- Depreciation Of Project A minus Depreciation of Project B
e- Depreciation is not a cash flow therefore it can be ignored.
Q6- Given the following, calculate the written down value at the end of the fourth year. (This is not multiple Question)
Cost: $600000
Diminishing Value Rate (Reducing Value Rate): 20%
Ans
Q7- The correct treatment for changes in working capital (net current assets) is
Ans
a- Increases in working capital are treated as cash outflows and are deducted for tax purposes over the life of the project.
b- Decreases in working capital are treated as cash outflows and are deducted for tax purposes over the life of the project.
c- Increases in working capital are treated as cash outflows and do not affect tax.
d- Decreases in working capital are treated as cash outflows and do not affect tax.
e- Working capital is not relevant for cash flow purposes or for taxation
Q8- Which of the following statements is correct? Assume a positive salvage value. Include any gain or loss in your analysis. Assume the same discount rate for all options.
Ans
a- Prime Cost Depreciation down to salvage value always gives the highest present value of tax savings for depreciation.
b- Both Diminishing value and Prime cost give the same Present Value of Depreciation tax savings as they have the same amount of deductions over the life of the project.
c- Prime Cost Depreciation down to zero always gives the highest present value of tax savings for depreciation.
d- Reducing Balance Depreciation using the Prime Rate gives the highest present value of tax savings.
e- Diminishing Value Depreciation always gives the highest present value of tax savings for depreciation.