Noreen5e Appendix07C TB AnswerKey

Managerial Accounting for Managers, 5e (Noreen)
Appendix 7C: Income Taxes and the Net Present Value Method
1) A capital budgeting project's incremental net income computation for purposes of determining
incremental tax expense includes immediate cash outflows for initial investments in equipment.
Answer: FALSE
Difficulty: 1 Easy
Topic: Income Taxes and the Net Present Value Method
Learning Objective: 07-08 (Appendix 7C) Include income taxes in a net present value analysis.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
2) When a company invests in equipment, it is not ordinarily allowed to immediately expense the
entire cost of the equipment when computing taxable income.
Answer: TRUE
Difficulty: 1 Easy
Bloom's: Remember
3) Depreciation expense is not included in the computation of incremental net income when
determining the income tax expense associated with a capital budgeting project.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Remember
1
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4) Under the simplifying assumptions made in the text, to calculate the amount of income tax
expense associated with an investment project, first calculate the incremental net cash inflow
during each year of the project and then multiply each year's incremental net cash inflow by the
tax rate.
Answer: FALSE
Difficulty: 2 Medium
Bloom's: Remember
5) Income taxes have no effect on whether a capital budgeting project should or should not be
accepted in a for-profit company.
Answer: FALSE
Bloom's: Understand
6) A capital budgeting project's incremental net income computation for purposes of determining
incremental tax expense includes investments in working capital.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Remember
7) The investment in working capital at the start of an investment project can be deducted from
revenues when computing taxable income.
Answer: FALSE
Bloom's: Understand
2
8) All cash inflows are taxable.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Remember
9) In net present value analysis, the release of working capital at the end of a project should be:
A) ignored.
B) included as a cash outflow.
C) included as a cash inflow.
D) included as a tax deduction.
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
10) In net present value analysis, an investment in equipment at the beginning of a project should
be:
A) ignored.
B) included as a cash outflow.
C) included as a cash inflow.
D) included as a tax deduction.
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
3
11) Nakama Corporation is considering investing in a project that would have a 4 year expected
useful life. The company would need to invest $280,000 in equipment that will have zero salvage
value at the end of the project. Annual incremental sales would be $640,000 and annual cash
operating expenses would be $480,000. In year 3 the company would have to incur one-time
renovation expenses of $50,000. Working capital in the amount of $20,000 would be required.
The working capital would be released for use elsewhere at the end of the project. The company
uses straight-line depreciation on all equipment. The company's tax rate is 30%.
The income tax expense in year 2:

A) $48,000
B) $12,000
C) $14,500
D) $27,000
Answer: D
Explanation: Depreciation expense = (Original cost – Salvage value) ÷ Useful life
= ($280,000 – $0) ÷ 4 years = $70,000 per year
Year
2
Calculate the annual tax expense:
Sales $ 640,000
Cash operating expenses $ (480,000)
Depreciation expense $ (70,000)
Incremental net income $ 90,000
Tax rate 30%
Income tax expense $ (27,000)
Bloom's: Apply
AACSB: Analytical Thinking
4
Exhibit 7B-1 Present Value of $1;
12) A company anticipates incremental net income (i.e., incremental taxable income) of $20,000
in year 3 of a project. The company's tax rate is 30% and its after-tax discount rate is 8%.
Use Exhibit 7B-1 to determine the appropriate discount factor(s) using table.
The present value of this future cash flow is closest to:

A) $6,000
B) $4,763
C) $14,000
D) $11,116
Answer: D
5
Explanation: Income tax expense = 0.30 × $20,000 = $6,000
After-tax net cash inflow = $20,000 – $6,000 = $14,000
Present value = 0.794 × $14,000 = $11,116

Difficulty: 1 Easy
Bloom's: Apply
13) A company needs an increase in working capital of $50,000 in a project that will last 4 years.
The company's tax rate is 30% and its after-tax discount rate is 8%.
The present value of the release of the working capital at the end of the project is closest to:
A) $36,750
B) $15,000
C) $25,726
D) $35,000
Answer: A
Explanation: Present value = 0.735 × $50,000 = $36,750
Difficulty: 1 Easy
Bloom's: Apply
6
14) Rhoads Corporation is considering a capital budgeting project that would require an
investment of $160,000 in equipment with a 4-year expected life and zero salvage value. Annual
incremental sales will be $460,000 and annual incremental cash operating expenses will be
$330,000. The company's income tax rate is 30% and the after-tax discount rate is 15%. The
company uses straight-line depreciation on all equipment; the annual depreciation expense will
be $40,000. Assume cash flows occur at the end of the year except for the initial investments.
The company takes income taxes into account in its capital budgeting.
The net present value of the project is closest to:

A) $178,252
B) $252,000
C) $97,040
D) $134,168
Answer: D
Explanation:
Bloom's: Apply
7
15) Fontana Corporation is considering a capital budgeting project that would require investing
$240,000 in equipment with an expected life of 4 years and zero salvage value. The annual
incremental sales would be $640,000 and the annual incremental cash operating expenses would
be $440,000. The company's income tax rate is 30%. The company uses straight-line
depreciation on all equipment.
The total cash flow net of income taxes in year 2 is:

A) $158,000
B) $200,000
C) $88,000
D) $140,000
Answer: A
= ($240,000 – $0) ÷ 4 years = $60,000 per year
Year
2
Sales $ 640,000
Tax rate 30%
Sales $ 640,000
Total cash flows $ 158,000
Difficulty: 1 Easy
Bloom's: Apply
8
16) The following information concerning a proposed capital budgeting project has been
provided by Jochum Corporation:
Investment required in equipment $ 280,000

Salvage value of equipment $ 0
Working capital requirement $ 10,000
Annual sales $ 630,000
Annual cash operating expenses $ 480,000
One-time renovation expense in year 3 $ 60,000
The expected life of the project is 4 years. The income tax rate is 30%. The after-tax discount
rate is 9%. The company uses straight-line depreciation on all equipment and the annual
depreciation expense would be $70,000. Assume cash flows occur at the end of the year except
for the initial investments. The company takes income taxes into account in its capital budgeting.
9
A) $176,900
B) $182,000
C) $84,770
D) $92,770
Answer: D
Explanation:
Difficulty: 3 Hard
Bloom's: Apply
10
17) Coache Corporation is considering a capital budgeting project that would require an
investment of $120,000 in equipment with a 4 year useful life and zero salvage value. The annual
incremental sales would be $310,000 and the annual incremental cash operating expenses would
be $230,000. In addition, there would be a one-time renovation expense in year 3 of $30,000.
The company's income tax rate is 30%. The company uses straight-line depreciation on all
equipment.

A) $44,000
B) $35,000
C) $65,000
D) $50,000
Answer: A
= ($120,000 – $0) ÷ 4 years = $30,000 per year
Year
3
Sales $ 310,000
One-time expense $ (30,000)
Tax rate 30%
Sales $ 310,000
Difficulty: 1 Easy
Bloom's: Apply
11
18) Mester Corporation has provided the following information concerning a capital budgeting
project:
After-tax discount rate 15%

Tax rate 30%
Expected life of the project 4
The company uses straight-line depreciation on all equipment. Assume cash flows occur at the
end of the year except for the initial investments. The company takes income taxes into account
in its capital budgeting.
12
A) $65,640
B) $119,000
C) $171,822
D) $51,822
Answer: D
= ($120,000 – $0) ÷ 4 years = $30,000 per year
Difficulty: 3 Hard
Bloom's: Apply
13
19) Last year the sales at Summit Corporation were $400,000 and were all cash sales. The
expenses at Summit were $250,000 and were all cash expenses. The tax rate was 30%. The after-
tax net cash inflow at Summit last year was:
A) $150,000
B) $45,000
C) $105,000
D) $400,000
Answer: C
Explanation:
Cash sales $ 400,000

Cash expenses 250,000
Net cash flow 150,000
Taxes (at 30% rate) 45,000
After-tax net cash flow $ 105,000
Difficulty: 1 Easy
Bloom's: Apply
14
20) Coffie Corporation has provided the following information concerning a capital budgeting
project:
Tax rate 30%

The company uses straight-line depreciation on all equipment.

A) $90,000
B) $75,000
C) $130,000
D) $103,000
Answer: D
15
= ($160,000 – $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 440,000
Tax rate 30%
Sales $ 440,000
Difficulty: 1 Easy
Bloom's: Apply
16
21) Bonomo Corporation has provided the following information concerning a capital budgeting
project:
Tax rate 30%

The income tax expense in year 3 is:
A) $24,000
B) $15,000
C) $36,000
D) $9,000
Answer: D
= ($160,000 – $0) ÷ 4 years = $40,000 per year
Year
3
Sales $ 420,000
Tax rate 30%
Difficulty: 1 Easy
Bloom's: Apply
17
22) Stepnoski Corporation is considering a capital budgeting project that would involve investing
$280,000 in equipment with an estimated useful life of 4 years and no salvage value at the end of
the useful life. Annual incremental sales from the project would be $610,000 and the annual
incremental cash operating expenses would be $490,000. A one-time renovation expense of
$20,000 would be required in year 3. The project would require investing $30,000 of working
capital in the project immediately, but this amount would be recovered at the end of the project
in 4 years. The company's income tax rate is 30% and its after-tax discount rate is 11%.

A) $15,000
B) $9,000
C) $7,000
D) $36,000
Answer: B
= ($280,000 – $0) ÷ 4 years = $70,000 per year
Year
3
Sales $ 610,000
Tax rate 30%
Bloom's: Apply
18
23) Schweinsberg Corporation is considering a capital budgeting project. The project would
require an investment of $120,000 in equipment with a 4 year expected life and zero salvage
value. The company uses straight-line depreciation and the annual depreciation expense will be
$30,000. Annual incremental sales would be $230,000 and annual incremental cash operating
expenses would be $180,000. The company's income tax rate is 30% and the after-tax discount
rate is 15%. The company takes income taxes into account in its capital budgeting. Assume cash
flows occur at the end of the year except for the initial investments.

A) $22,800
B) $125,664
C) $56,000
D) $5,664
Answer: D
19
Explanation:
Bloom's: Apply
20
24) Infante Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%

A) $78,000
B) $63,000
C) $92,000
D) $42,000
Answer: A
21
= ($200,000 – $0) ÷ 4 years = $50,000 per year
Year
2
Sales $ 480,000
Tax rate 30%
Sales $ 480,000
Bloom's: Apply
22
25) Eison Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%

A) $21,000
B) $42,000
C) $15,000
D) $6,000
Answer: D
= ($280,000 – $0) ÷ 4 years = $70,000 per year
Year
3
Sales $ 610,000
Tax rate 30%
Bloom's: Apply
23
26) Mcelveen Corporation has provided the following information concerning a capital
budgeting project:

Tax rate 30%
24
A) $60,960
B) $21,934
C) $84,000
D) $34,194
Answer: D
= ($80,000 – $0) ÷ 4 years = $20,000 per year
Difficulty: 3 Hard
Bloom's: Apply
25
27) Inocencio Corporation has provided the following information concerning a capital
budgeting project:
Tax rate 30%

A) $35,000
B) $95,000
C) $165,000
D) $110,000
Answer: B
26
= ($240,000 – $0) ÷ 4 years = $60,000 per year
Year
3
Sales $ 680,000
Tax rate 30%
Sales $ 680,000
Difficulty: 1 Easy
Bloom's: Apply
27
28) Maurer Corporation is considering a capital budgeting project that would involve investing
$200,000 in equipment with an estimated useful life of 4 years and no salvage value at the end of
the useful life. Annual incremental sales from the project would be $550,000 and the annual
incremental cash operating expenses would be $440,000. A one-time renovation expense of
$40,000 would be required in year 3. The company's income tax rate is 30%.
A) $6,000
B) $33,000
C) $18,000
D) $21,000
Answer: A
= ($200,000 – $0) ÷ 4 years = $50,000 per year
Year
3
Sales $ 550,000
Tax rate 30%
Difficulty: 1 Easy
Bloom's: Apply
28
29) Dobrinski Corporation has provided the following information concerning a capital
budgeting project:

Tax rate 30%
29
A) $144,210
B) $210,000
C) $77,709
D) $59,949
Answer: C
= ($240,000 – $0) ÷ 4 years = $60,000 per year
Difficulty: 3 Hard
Bloom's: Apply
30
30) Truskowski Corporation has provided the following information concerning a capital
budgeting project:

Tax rate 30%
The company uses straight-line depreciation on all equipment; the annual depreciation expense
will be $60,000. Assume cash flows occur at the end of the year except for the initial
investments. The company takes income taxes into account in its capital budgeting.
A) $280,000
B) $386,620
C) $235,840
D) $146,620
Answer: D
31
Explanation:
Bloom's: Apply
32
31) Marasco Corporation has provided the following information concerning a capital budgeting
project:

The income tax rate is 30%. The after-tax discount rate is 13%. The company uses straight-line
depreciation on all equipment; the annual depreciation expense will be $20,000. Assume cash
flows occur at the end of the year except for the initial investments. The company takes income
taxes into account in its capital budgeting.

A) $91,000
B) $128,199
C) $77,650
D) $48,199
Answer: D
33
Explanation:
Bloom's: Apply
34
32) Antinoro Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
Salvage value $ 0

A) $3,000
B) $18,000
C) $36,000
D) $21,000
Answer: D
= ($200,000 – $0) ÷ 4 years = $50,000 per year
Year
2
Sales $ 480,000
Tax rate 30%
Bloom's: Apply
35
33) Halwick Corporation is considering a capital budgeting project that would have a useful life
of 4 years and would involve investing $120,000 in equipment that would have zero salvage
value at the end of the project. Annual incremental sales would be $360,000 and annual cash
operating expenses would be $280,000. The company uses straight-line depreciation on all
equipment. Its income tax rate is 30%.

A) $6,000
B) $9,000
C) $15,000
D) $24,000
Answer: C
= ($120,000 – $0) ÷ 4 years = $30,000 per year
Year
2
Sales $ 360,000
Tax rate 30%
Difficulty: 1 Easy
Bloom's: Apply
36
34) Lennox Corporation has provided the following information concerning a capital budgeting
project:

The company's tax rate is 30%. The company's after-tax discount rate is 8%. The project would
require an investment of $20,000 at the beginning of the project. This working capital would be
released for use elsewhere at the end of the project. The company uses straight-line depreciation
on all equipment.

A) $30,000
B) $26,000
C) $41,000
D) $50,000
Answer: C
= ($80,000 – $0) ÷ 4 years = $20,000 per year
Year
2
Sales $ 200,000
Tax rate 30%
Sales $ 200,000
Bloom's: Apply
37
35) Barbera Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
A) $77,000
B) $104,000
C) $71,000
D) $80,000
Answer: C
38
= ($200,000 – $0) ÷ 4 years = $50,000 per year
Year
3
Sales $ 540,000
Tax rate 30%
Sales $ 540,000
Bloom's: Apply
39
36) Bratton Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
The company uses straight-line depreciation on all equipment; the annual depreciation expense
will be $40,000. Assume cash flows occur at the end of the year except for the initial
40
A) $104,686
B) $196,000
C) $154,000
D) $75,580
Answer: D
Explanation:
Bloom's: Apply
41
37) Colantro Corporation has provided the following information concerning a capital budgeting
project:
Tax rate 30%

A) $30,000
B) $3,000
C) $9,000
D) $12,000
Answer: D
= ($240,000 – $0) ÷ 4 years = $60,000 per year
Year
2
Sales $ 490,000
Tax rate 30%
Difficulty: 1 Easy
Bloom's: Apply
42
38) Chene Corporation has provided the following information concerning a capital budgeting
project:

The equipment will have a 4 year expected life and zero salvage value. The company's income
tax rate is 30%, and the after-tax discount rate is 10%. The company uses straight-line
depreciation on all equipment; the annual depreciation expense will be $50,000. Assume cash

A) $335,914
B) $224,000
C) $169,516
D) $135,914
43
Answer: D
Explanation:
Bloom's: Apply
44
39) Stockinger Corporation has provided the following information concerning a capital
budgeting project:

The company's income tax rate is 30% and its after-tax discount rate is 11%. The working capital
would be required immediately and would be released for use elsewhere at the end of the project.
A) $133,000
B) $160,000
C) $90,000
D) $77,000
Answer: A
45
= ($280,000 – $0) ÷ 4 years = $70,000 per year
Year
2
Sales $ 580,000
Tax rate 30%
Sales $ 580,000
Bloom's: Apply
46
budgeting project:

A) $77,000
B) $80,000
C) $48,000
D) $128,000
Answer: A
47
= ($280,000 – $0) ÷ 4 years = $70,000 per year
Year
3
Sales $ 580,000
Tax rate 30%
Sales $ 580,000
Bloom's: Apply
48
budgeting project:

49
The net present value of the entire project is closest to:
A) $196,000
B) $61,763
C) $81,533
D) $122,469
Answer: C
= ($280,000 – $0) ÷ 4 years = $70,000 per year
Difficulty: 3 Hard
Bloom's: Apply
50
42) Podratz Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%

A) $160,000
B) $110,000
C) $127,000
D) $77,000
Answer: C
51
= ($200,000– $0) ÷ 4 years = $50,000 per year
Year
2
Sales $ 580,000
Tax rate 30%
Sales $ 580,000
Bloom's: Apply
52
project:

Tax rate 30%
A) $61,500
B) $127,000
C) $85,000
D) $100,000
Answer: C
53
Explanation: Depreciation expense = (Original cost − Salvage value) ÷ Useful life
= ($200,000 − $0) ÷ 4 years = $50,000 per year
Year
3
Sales $ 580,000
Tax rate 30%
Sales $ 580,000
Bloom's: Apply
54
project:

Tax rate 30%
55
A) $187,276
B) $220,624
C) $308,000
D) $266,000
Answer: A
= ($200,000 − $0) ÷ 4 years = $50,000 per year
Difficulty: 3 Hard
Bloom's: Apply
56
45) Mesko Corporation has provided the following information concerning a capital budgeting
project:

The company's income tax rate is 30% and its after-tax discount rate is 15%. The company uses
straight-line depreciation on all equipment. Assume cash flows occur at the end of the year
except for the initial investments. The company takes income taxes into account in its capital
budgeting.
A) $12,000
B) $18,000
C) $6,000
D) $24,000
Answer: B
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
2
Sales $ 270,000
Tax rate 30%
Bloom's: Apply
57
project:

budgeting.
A) $6,000
B) $18,000
C) $24,000
D) $12,000
Answer: A
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
3
Sales $ 270,000
Tax rate 30%
Bloom's: Apply
58
project:

budgeting.
A) $42,000
B) $56,000
C) $62,000
D) $80,000
Answer: C
59
Explanation: Depreciation expense = (Original cost – Salvage value) ÷ Useful life = ($80,000 –
$0) ÷ 4 years = $20,000 per year
Year
2
Sales $ 270,000
Tax rate 30%
Sales $ 270,000
Bloom's: Apply
60
project:

budgeting.

A) $34,000
B) $62,000
C) $14,000
D) $40,000
Answer: A
61
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
3
Sales $ 270,000
Tax rate 30%
Sales $ 270,000
Bloom's: Apply
62
project:

budgeting.
63
A) $78,648
B) $168,000
C) $97,072
D) $140,000
Answer: A
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Difficulty: 3 Hard
Bloom's: Apply
64
50) Manjarrez Corporation has provided the following information concerning a capital
budgeting project:

budgeting.
A) $18,000
B) $168,000
C) $21,000
D) $129,000
Answer: C
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
2
Sales $ 560,000
Tax rate 30%
Bloom's: Apply
65
budgeting project:

budgeting.
A) $109,000
B) $130,000
C) $70,000
D) $21,000
Answer: A
66
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
2
Sales $ 560,000
Tax rate 30%
Sales $ 560,000
Bloom's: Apply
67
budgeting project:

budgeting.
68
A) $377,685
B) $137,685
C) $210,450
D) $196,000
Answer: B
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Bloom's: Apply
69
53) Waltermire Corporation has provided the following information concerning a capital
budgeting project:

Tax rate 30%
The working capital would be required immediately and would be released for use elsewhere at
the end of the project. The company uses straight-line depreciation on all equipment. Assume
cash flows occur at the end of the year except for the initial investments. The company takes
income taxes into account in its capital budgeting.
A) $24,000
B) $12,000
C) $102,000
D) $138,000
Answer: A
70
= ($160,000 – $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 460,000
Tax rate 30%
Bloom's: Apply
71
budgeting project:

Tax rate 30%
A) $96,000
B) $24,000
C) $120,000
D) $80,000
Answer: A
72
Explanation: Depreciation expense = (Original cost - Salvage value) ÷ Useful life
= ($160,000 - $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 460,000
Tax rate 30%
Sales $ 460,000
Bloom's: Apply
73
budgeting project:

Tax rate 30%
74
A) $224,000
B) $193,640
C) $101,648
D) $120,728
Answer: D
= ($160,000 – $0) ÷ 4 years = $40,000 per year
Difficulty: 3 Hard
Bloom's: Apply
75
56) Boynes Corporation is considering a capital budgeting project that would require investing
$200,000 in equipment with an expected life of 4 years and zero salvage value. Annual
incremental sales would be $490,000 and annual incremental cash operating expenses would be
$330,000. The project would also require an immediate investment in working capital of $10,000
which would be released for use elsewhere at the end of the project. The project would also
require a one-time renovation cost of $70,000 in year 3. The company's income tax rate is 30%
and its after-tax discount rate is 14%. The company uses straight-line depreciation. Assume cash
A) $33,000
B) $48,000
C) $21,000
D) $12,000
Answer: A
= ($200,000 − $0) ÷ 4 years = $50,000 per year
Year
2
Sales $ 490,000
Tax rate 30%
Bloom's: Apply
76

A) $12,000
B) $48,000
C) $33,000
D) $21,000
Answer: A
= ($200,000 – $0) ÷ 4 years = $50,000 per year
Year
3
Sales $ 490,000
Tax rate 30%
Bloom's: Apply
77

A) $78,000
B) $160,000
C) $110,000
D) $127,000
Answer: D
= ($200,000 – $0) ÷ 4 years = $50,000 per year
Year
2
Sales $ 490,000
Tax rate 30%
Sales $ 490,000
Bloom's: Apply
78

A) $78,000
B) $90,000
C) $57,000
D) $127,000
Answer: A
= ($200,000 - $0) ÷ 4 years = $50,000 per year
Year
3
Sales $ 490,000
Tax rate 30%
Sales $ 490,000
Bloom's: Apply
79

A) $259,000
B) $126,876
C) $214,750
D) $132,796
Answer: D
80
= ($200,000 − $0) ÷ 4 years = $50,000 per year
Difficulty: 3 Hard
Bloom's: Apply
81
61) Hinger Corporation is considering a capital budgeting project that would require investing

A) $49,000
B) $100,000
C) $79,000
D) $70,000
Answer: C
= ($120,000 − $0) ÷ 4 years = $30,000 per year
Year
2
Sales $ 350,000
Tax rate 30%
Sales $ 350,000
Bloom's: Apply
82

A) $79,000
B) $42,000
C) $51,000
D) $30,000
Answer: C
= ($120,000 − $0) ÷ 4 years = $30,000 per year
Year
3
Sales $ 350,000
Tax rate 30%
Sales $ 350,000
Bloom's: Apply
83

A) $101,259
B) $108,547
C) $115,137
D) $240,000
Answer: A
84
= ($120,000 − $0) ÷ 4 years = $30,000 per year
Difficulty: 3 Hard
Bloom's: Apply
85
64) Reye Corporation has provided the following information concerning a capital budgeting
project:

A) $129,000
B) $15,000
C) $18,000
D) $96,000
Answer: C
= ($200,000 − $0) ÷ 4 years = $50,000 per year
Year
2
Sales $ 430,000
Tax rate 30%
Bloom's: Apply
86
project:

A) $60,000
B) $110,000
C) $18,000
D) $92,000
Answer: D
87
= ($200,000 − $0) ÷ 4 years = $50,000 per year
Year
2
Sales $ 430,000
Tax rate 30%
Sales $ 430,000
Bloom's: Apply
88
project:

89
A) $92,148
B) $150,450
C) $77,988
D) $168,000
Answer: A
= ($200,000 − $0) ÷ 4 years = $50,000 per year
Difficulty: 3 Hard
Bloom's: Apply
90
67) Vanzant Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
A) $48,000
B) $9,000
C) $21,000
D) $30,000
Answer: D
91
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
2
Sales $ 540,000
Tax rate 30%
Bloom's: Apply
92
project:

Tax rate 30%

A) $30,000
B) $21,000
C) $9,000
D) $48,000
Answer: C
93
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
3
Sales $ 540,000
Tax rate 30%
Bloom's: Apply
94
project:

Tax rate 30%
Use Exhibit 7B-1, to determine the appropriate discount factor(s) using the tables provided.

A) $149,290
B) $251,440
C) $165,130
D) $231,000
Answer: C
95
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Difficulty: 3 Hard
Bloom's: Apply
96
70) Bourland Corporation is considering a capital budgeting project that would require investing
$180,000. The project would also require a one-time renovation cost of $40,000 in year 3. The
company's income tax rate is 30% and its after-tax discount rate is 8%. The company uses
straight-line depreciation. Assume cash flows occur at the end of the year except for the initial

A) $3,000
B) $15,000
C) $21,000
D) $12,000
Answer: B
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
2
Sales $ 250,000
Tax rate 30%
Bloom's: Apply
97

A) $3,000
B) $21,000
C) $12,000
D) $15,000
Answer: A
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
3
Sales $ 250,000
Tax rate 30%
Bloom's: Apply
98

A) $79,928
B) $159,928
C) $120,080
D) $112,000
Answer: A
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Difficulty: 3 Hard
Bloom's: Apply
99
73) Decelle Corporation is considering a capital budgeting project that would require investing

A) $9,000
B) $15,000
C) $6,000
D) $3,000
Answer: A
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
2
Sales $ 260,000
Tax rate 30%
Bloom's: Apply
100

A) $15,000
B) $6,000
C) $3,000
D) $9,000
Answer: C
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
3
Sales $ 260,000
Tax rate 30%
Bloom's: Apply
101

A) $14,590
B) $50,380
C) $70,000
D) $27,310
Answer: D
102
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Difficulty: 3 Hard
Bloom's: Apply
103
76) Correll Corporation is considering a capital budgeting project that would require investing

A) $27,000
B) $15,000
C) $45,000
D) $12,000
Answer: A
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
2
Sales $ 570,000
Tax rate 30%
Bloom's: Apply
104

A) $27,000
B) $15,000
C) $12,000
D) $45,000
Answer: B
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
3
Sales $ 570,000
Tax rate 30%
Bloom's: Apply
105

A) $95,000
B) $90,000
C) $150,000
D) $123,000
Answer: D
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
2
Sales $ 570,000
Tax rate 30%
Sales $ 570,000
Bloom's: Apply
106

A) $83,000
B) $123,000
C) $95,000
D) $110,000
Answer: C
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
3
Sales $ 570,000
Tax rate 30%
Sales $ 570,000
Bloom's: Apply
107

A) $224,000
B) $162,080
C) $92,864
D) $332,864
Answer: C
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Difficulty: 3 Hard
Bloom's: Apply
108
81) Lafromboise Corporation has provided the following information concerning a capital
budgeting project:

Tax rate 30%
A) $12,000
B) $42,000
C) $30,000
D) $60,000
Answer: B
109
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
2
Sales $ 690,000
Tax rate 30%
Bloom's: Apply
110
budgeting project:

Tax rate 30%
A) $42,000
B) $30,000
C) $12,000
D) $60,000
Answer: C
111
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
3
Sales $ 690,000
Tax rate 30%
Bloom's: Apply
112
budgeting project:

Tax rate 30%

A) $158,000
B) $200,000
C) $140,000
D) $88,000
Answer: A
113
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
2
Sales $ 690,000
Tax rate 30%
Sales $ 690,000
Bloom's: Apply
114
budgeting project:

Tax rate 30%
A) $58,000
B) $158,000
C) $100,000
D) $88,000
Answer: D
115
= ($240,000 - $0) ÷ 4 years = $60,000 per year
Year
3
Sales $ 690,000
Tax rate 30%
Sales $ 690,000
Bloom's: Apply
116
budgeting project:

Tax rate 30%

A) $246,590
B) $238,670
C) $322,000
D) $366,920
Answer: A
117
= ($240,000 − $0) ÷ 4 years = $60,000 per year
Difficulty: 3 Hard
Bloom's: Apply
118
86) Marbry Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
A) $6,000
B) $36,000
C) $24,000
D) $19,500
Answer: C
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 460,000
Tax rate 30%
Bloom's: Apply
119
project:

Tax rate 30%
A) $36,000
B) $19,500
C) $24,000
D) $6,000
Answer: D
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
3
Sales $ 460,000
Tax rate 30%
Bloom's: Apply
120
project:

Tax rate 30%
A) $118,520
B) $224,000
C) $278,520
D) $150,944
Answer: A
121
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Difficulty: 3 Hard
Bloom's: Apply
122
89) Mulford Corporation has provided the following information concerning a capital budgeting
project:


A) $6,000
B) $9,000
C) $15,000
D) $3,000
Answer: B
123
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
2
Sales $ 250,000
Tax rate 30%
Bloom's: Apply
124
project:


A) $15,000
B) $6,000
C) $9,000
D) $3,000
Answer: D
125
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
3
Sales $ 250,000
Tax rate 30%
Bloom's: Apply
126
project:

A) $50,380
B) $14,590
C) $27,310
D) $70,000
Answer: C
127
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Difficulty: 3 Hard
Bloom's: Apply
128
92) Prudencio Corporation has provided the following information concerning a capital
budgeting project:

Tax rate 30%

A) $12,000
B) $33,000
C) $21,000
D) $9,000
Answer: C
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 400,000
Tax rate 30%
Bloom's: Apply
129
budgeting project:

Tax rate 30%

A) $21,000
B) $12,000
C) $9,000
D) $33,000
Answer: C
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
3
Sales $ 400,000
Tax rate 30%
Bloom's: Apply
130
budgeting project:

Tax rate 30%

A) $61,000
B) $70,000
C) $110,000
D) $89,000
Answer: D
131
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 400,000
Tax rate 30%
Sales $ 400,000
Bloom's: Apply
132
budgeting project:

Tax rate 30%
A) $70,000
B) $49,000
C) $89,000
D) $61,000
Answer: D
133
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
3
Sales $ 400,000
Tax rate 30%
Sales $ 400,000
Bloom's: Apply
134
budgeting project:

Tax rate 30%

A) $85,282
B) $139,420
C) $245,282
D) $168,000
Answer: A
135
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Difficulty: 3 Hard
Bloom's: Apply
136
97) Paletta Corporation has provided the following information concerning a capital budgeting
project:

budgeting.
A) $154,000
B) $120,000
C) $98,000
D) $190,000
Answer: A
137
= ($280,000 − $0) ÷ 4 years = $70,000 per year
Year
2
Sales $ 660,000
Tax rate 30%
Sales $ 660,000
Bloom's: Apply
138
project:

budgeting.
A) $98,000
B) $110,000
C) $74,000
D) $154,000
Answer: A
139
= ($280,000 − $0) ÷ 4 years = $70,000 per year
Year
3
Sales $ 660,000
Tax rate 30%
Sales $ 660,000
Bloom's: Apply
140
project:

budgeting.

A) $298,250
B) $475,902
C) $195,902
D) $280,000
Answer: C
141
= ($280,000 − $0) ÷ 4 years = $70,000 per year
Difficulty: 3 Hard
Bloom's: Apply
142
100) Rollans Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
A) $105,000
B) $39,000
C) $180,000
D) $24,000
Answer: D
= ($200,000 − $0) ÷ 4 years = $50,000 per year
Year
2
Sales $ 430,000
Tax rate 30%
Bloom's: Apply
143
project:

Tax rate 30%
A) $80,000
B) $24,000
C) $106,000
D) $130,000
Answer: C
144
= ($200,000 − $0) ÷ 4 years = $50,000 per year
Year
2
Sales $ 430,000
Tax rate 30%
Sales $ 430,000
Bloom's: Apply
145
project:

Tax rate 30%
A) $308,778
B) $224,000
C) $108,778
D) $118,230
Answer: C
146
= ($200,000 − $0) ÷ 4 years = $50,000 per year
Bloom's: Apply
147
103) Planas Corporation has provided the following information concerning a capital budgeting
project:

budgeting.

A) $18,000
B) $9,000
C) $12,000
D) $3,000
Answer: C
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
2
Sales $ 210,000
Tax rate 30%
Bloom's: Apply
148
project:

budgeting.

A) $12,000
B) $18,000
C) $3,000
D) $9,000
Answer: C
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
3
Sales $ 210,000
Tax rate 30%
Bloom's: Apply
149
project:

budgeting.
A) $59,824
B) $91,000
C) $45,649
D) $130,000
Answer: C
150
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Difficulty: 3 Hard
Bloom's: Apply
151
106) Bedolla Corporation is considering a capital budgeting project that would require investing
$310,000. The company's income tax rate is 30% and its after-tax discount rate is 8%. The
company uses straight-line depreciation. Assume cash flows occur at the end of the year except
for the initial investments. The company takes income taxes into account in its capital budgeting.
A) $12,000
B) $24,000
C) $93,000
D) $129,000
Answer: B
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 430,000
Tax rate 30%
Bloom's: Apply
152
for the initial investments. The company takes income taxes into account in its capital
budgeting.

A) $80,000
B) $96,000
C) $24,000
D) $120,000
Answer: B
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 430,000
Tax rate 30%
Sales $ 430,000
Bloom's: Apply
153
for the initial investments. The company takes income taxes into account in its capital
budgeting.

A) $317,952
B) $157,952
C) $237,440
D) $224,000
Answer: B
154
= ($160,000 - $0) ÷ 4 years = $40,000 per year
Bloom's: Apply
155
109) Annala Corporation is considering a capital budgeting project that would require investing
which would be released for use elsewhere at the end of the project. The company's income tax
rate is 30% and its after-tax discount rate is 13%. The company uses straight-line depreciation.
Assume cash flows occur at the end of the year except for the initial investments. The company
takes income taxes into account in its capital budgeting.

A) $75,000
B) $54,000
C) $6,000
D) $15,000
Answer: D
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
2
Sales $ 250,000
Tax rate 30%
Bloom's: Apply
156

A) $15,000
B) $70,000
C) $55,000
D) $50,000
Answer: C
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
2
Sales $ 250,000
Tax rate 30%
Sales $ 250,000
Bloom's: Apply
157

A) $140,000
B) $120,440
C) $75,830
D) $63,570
Answer: C
158
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Difficulty: 3 Hard
Bloom's: Apply
159
112) Houze Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
A) $30,000
B) $49,000
C) $61,000
D) $70,000
Answer: C
160
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 360,000
Tax rate 30%
Sales $ 360,000
Bloom's: Apply
161
project:

Tax rate 30%

A) $35,000
B) $50,000
C) $47,000
D) $61,000
Answer: C
162
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
3
Sales $ 360,000
Tax rate 30%
Sales $ 360,000
Bloom's: Apply
163
project:

Tax rate 30%
A) $28,073
B) $70,000
C) $5,183
D) $54,000
Answer: A
164
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Difficulty: 3 Hard
Bloom's: Apply
165
115) Layer Corporation has provided the following information concerning a capital budgeting
project:


A) $3,000
B) $9,000
C) $21,000
D) $6,000
Answer: B
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 360,000
Tax rate 30%
Bloom's: Apply
166
project:


A) $21,000
B) $9,000
C) $6,000
D) $3,000
Answer: D
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
3
Sales $ 360,000
Tax rate 30%
Bloom's: Apply
167
project:

A) $70,000
B) $47,000
C) $30,000
D) $61,000
Answer: D
168
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 360,000
Tax rate 30%
Sales $ 360,000
Bloom's: Apply
169
project:

A) $41,000
B) $61,000
C) $47,000
D) $50,000
Answer: C
170
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
3
Sales $ 360,000
Tax rate 30%
Sales $ 360,000
Bloom's: Apply
171
project:


A) $50,660
B) $25,616
C) $10,916
D) $70,000
Answer: B
172
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Difficulty: 3 Hard
Bloom's: Apply
173
120) Donayre Corporation is considering a capital budgeting project that would require investing

A) $91,000
B) $130,000
C) $103,000
D) $63,000
Answer: C
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
2
Sales $ 450,000
Tax rate 30%
Sales $ 450,000
Bloom's: Apply
174

A) $54,000
B) $42,000
C) $14,000
D) $103,000
Answer: A
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
3
Sales $ 450,000
Tax rate 30%
Sales $ 450,000
Bloom's: Apply
175
A) $308,877
B) $148,877
C) $203,000
D) $188,861
Answer: B
176
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Difficulty: 3 Hard
Bloom's: Apply
177
123) Petro Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
Investment required in equipment $80,000
Salvage value of equipment $0
Working capital requirement $20,000
Annual sales $180,000
Annual cash operating expenses $140,000
Required:
Determine the net present value of the project. Show your work!
178
Answer: Depreciation expense = (Original cost − Salvage value) ÷ Useful life
= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
Now 1 2 3 4
Calculate the annual tax
expense:
Sales $180,000 $180,000 $180,000 $180,000
Cash operating expenses $(140,000) $(140,000) $(140,000) $(140,000)
Depreciation expense $(20,000) $(20,000) $(20,000) $(20,000)
Incremental net income $20,000 $20,000 $20,000 $20,000
Tax rate 30% 30% 30% 30%
Income tax expense $(6,000) $(6,000) $(6,000) $(6,000)
Calculate the net

present value:
Purchase of equipment $(80,000)
Working capital $(20,000) $20,000
Sales $180,000 $180,000 $180,000 $180,000
Total cash flows $(100,000) $34,000 $34,000 $34,000 $54,000
Discount factor (11%) 1.000 0.901 0.812 0.731 0.659
Present value of cash
flows $(100,000) $30,634 $27,608 $24,854 $35,586
Net present value $18,682
Topic: Income taxes in capital budgeting
Bloom's: Apply
179
124) Morefield Corporation has provided the following information concerning a capital
budgeting project:

The company uses straight-line depreciation. The depreciation expense will be $10,000 per year.
takes income taxes into account in its capital budgeting. The income tax rate is 30% and the
after-tax discount rate is 12%.
Required:
Answer:
Year
Now 1 2 3 4
expense:
Sales $170,000 $170,000 $170,000 $170,000
Tax rate 30% 30% 30% 30%
Calculate the net present

value:
Sales $170,000 $170,000 $170,000 $170,000
Total cash flows $(40,000) $31,000 $31,000 $31,000 $31,000
Discount factor (12%) 1.000 0.893 0.797 0.712 0.636
Present value of cash flows $(40,000) $27,683 $24,707 $22,072 $19,716
Bloom's: Apply
180
125) Duma Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
Required:
181
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
Now 1 2 3 4
Calculate the annual
tax expense:
Sales $490,000 $490,000 $490,000 $490,000
Cash operating
expenses $(350,000) $(350,000) $(350,000) $(350,000)
Tax rate 30% 30% 30% 30%
Calculate the net

present value:
Sales $490,000 $490,000 $490,000 $490,000
Cash operating
expenses $(350,000) $(350,000) $(350,000) $(350,000)
Total cash flows $(160,000) $110,000 $110,000 $110,000 $110,000
Discount factor (11%) 1.000 0.901 0.812 0.731 0.659
flows $(160,000) $99,110 $89,320 $80,410 $72,490
Difficulty: 1 Easy
Bloom's: Apply
182
126) Rapozo Corporation has provided the following information concerning a capital budgeting
project:

Net annual operating cash inflow $230,000
Tax rate 30%
The expected life of the project and the equipment is 3 years and the equipment has zero salvage
value. The company uses straight-line depreciation on all equipment and the depreciation
expense on the equipment would be $160,000 per year. Assume cash flows occur at the end of
the year except for the initial investments. The company takes income taxes into account in its
capital budgeting. The net annual operating cash inflow is the difference between the incremental
sales revenue and incremental cash operating expenses.
Required:
Answer:
Year
Now 1 2 3
expense:
Net annual operating cash
inflow $230,000 $230,000 $230,000
Depreciation expense $(160,000) $(160,000) $(160,000)
Incremental net income $70,000 $70,000 $70,000
Tax rate 30% 30% 30%
Income tax expense $(21,000) $(21,000) $(21,000)

value:
inflow $230,000 $230,000 $230,000
Total cash flows $(480,000) $209,000 $209,000 $209,000
Discount factor (7%) 1.000 0.935 0.873 0.816
Present value of cash flows $(480,000) $195,415 $182,457 $170,544
Difficulty: 1 Easy
Bloom's: Apply
183
127) Condo Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
Required:
Answer:
Year
Now 1 2 3
expense:
inflow $230,000 $230,000 $230,000
Tax rate 30% 30% 30%

value:
inflow $230,000 $230,000 $230,000
Total cash flows $(480,000) $209,000 $209,000 $209,000
Discount factor (12%) 1.000 0.893 0.797 0.712
Difficulty: 1 Easy
Bloom's: Apply
184
128) Shanks Corporation is considering a capital budgeting project that involves investing
$600,000 in equipment that would have a useful life of 3 years and zero salvage value. The
company would also need to invest $20,000 immediately in working capital which would be
released for use elsewhere at the end of the project in 3 years. The net annual operating cash
inflow, which is the difference between the incremental sales revenue and incremental cash
operating expenses, would be $300,000 per year. The project would require a one-time
renovation expense of $60,000 at the end of year 2. The company uses straight-line depreciation
and the depreciation expense on the equipment would be $200,000 per year. Assume cash flows
occur at the end of the year except for the initial investments. The company takes income taxes
into account in its capital budgeting. The income tax rate is 30%. The after-tax discount rate is
15%.
Required:
Answer:
Year
Now 1 2 3
expense:
inflow $300,000 $300,000 $300,000
One-time expense $(60,000)
Tax rate 30% 30% 30%

value:
inflow $300,000 $300,000 $300,000
Total cash flows $(620,000) $270,000 $228,000 $290,000
Discount factor (15%) 1.000 0.870 0.756 0.658
Net present value $(21,912)
Bloom's: Apply
185
129) Falkowski Corporation has provided the following information concerning a capital
budgeting project:

the end of the project. The company uses straight-line depreciation. The depreciation expense
will be $50,000 per year. Assume cash flows occur at the end of the year except for the initial
investments. The company takes income taxes into account in its capital budgeting. The income
tax rate is 30% and the after-tax discount rate is 8%.
Required:
Answer:
Year
Now 1 2 3 4
expense:
Sales $480,000 $480,000 $480,000 $480,000
Tax rate 30% 30% 30% 30%

value:
Sales $480,000 $480,000 $480,000 $480,000
Total cash flows $(220,000) $127,000 $127,000 $127,000 $147,000
Discount factor (8%) 1.000 0.926 0.857 0.794 0.735
Bloom's: Apply
186
130) Dunstan Corporation is considering a capital budgeting project that involves investing
$450,000 in equipment that would have a useful life of 3 years and zero salvage value. The
company would also need to invest $20,000 immediately in working capital which would be
released for use elsewhere at the end of the project in 3 years. The net annual operating cash
inflow, which is the difference between the incremental sales revenue and incremental cash
operating expenses, would be $220,000 per year. The company uses straight-line depreciation
11%.
Required:
Answer:
Year
Now 1 2 3
expense:
inflow $220,000 $220,000 $220,000
Tax rate 30% 30% 30%

value:
inflow $220,000 $220,000 $220,000
Total cash flows $(470,000) $199,000 $199,000 $219,000
Discount factor (11%) 1.000 0.901 0.812 0.731
Bloom's: Apply
187
131) Nessen Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
One-time renovation expense in year 3 $90,000
Required:
188
= ($200,000 − $0) ÷ 4 years = $50,000 per year
Year
Now 1 2 3 4
expense:
Sales $580,000 $580,000 $580,000 $580,000
Tax rate 30% 30% 30% 30%

value:
Sales $580,000 $580,000 $580,000 $580,000
Total cash flows $(200,000) $141,000 $141,000 $78,000 $141,000
Discount factor (6%) 1.000 0.943 0.890 0.840 0.792
flows $(200,000) $132,963 $125,490 $65,520 $111,672
Bloom's: Apply
189
132) Ariel Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
value. The working capital would be required immediately and would be released for use
elsewhere at the end of the project. The company uses straight-line depreciation on all equipment
into account in its capital budgeting. The net annual operating cash inflow is the difference
between the incremental sales revenue and incremental cash operating expenses.
Required:
Answer:
Year
Now 1 2 3
expense:
Net annual operating cash inflow $300,000 $300,000 $300,000
Tax rate 30% 30% 30%
Calculate the net present value:

Total cash flows $(660,000) $270,000 $270,000 $300,000
Discount factor (14%) 1.000 0.877 0.769 0.675
Net present value $(13,080)
Bloom's: Apply
190
133) Skowyra Corporation has provided the following information concerning a capital
budgeting project:

7%. The net annual operating cash inflow is the difference between the incremental sales
revenue and incremental cash operating expenses.
Required:
191
Answer:
Year
Now 1 2 3
expense:
inflow $270,000 $270,000 $270,000
Tax rate 30% 30% 30%

value:
inflow $270,000 $270,000 $270,000
Total cash flows $(570,000) $243,000 $194,000 $273,000
Discount factor (7%) 1.000 0.935 0.873 0.816
Bloom's: Apply
192
134) McCrohan Corporation is considering a capital budgeting project that would require
investing $160,000 in equipment with a 4 year useful life and zero salvage value. Data
concerning that project appear below:
Annual incremental sales $410,000

Annual incremental cash operating expenses $330,000
An investment of $30,000 in working capital would be required immediately and would be

on all equipment. Assume cash flows occur at the end of the year except for the initial
investments. The company takes income taxes into account in its capital budgeting. The
company's tax rate is 30% and the after-tax discount rate is 10%.
Required:
193
= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
Now 1 2 3 4
Calculate the annual
tax expense:
Sales $410,000 $410,000 $410,000 $410,000
Cash operating
expenses $(330,000) $(330,000) $(330,000) $(330,000)
Incremental net
income $40,000 $40,000 $40,000 $40,000
Tax rate 30% 30% 30% 30%
Calculate the net

present value:
Purchase of
equipment $(160,000)
Sales $410,000 $410,000 $410,000 $410,000
Cash operating
expenses $(330,000) $(330,000) $(330,000) $(330,000)
Total cash flows $(190,000) $68,000 $68,000 $68,000 $98,000
Discount factor (10%) 1.000 0.909 0.826 0.751 0.683
flows $(190,000) $61,812 $56,168 $51,068 $66,934
Bloom's: Apply
194
135) Galati Corporation has provided the following information concerning a capital budgeting
project:

the end of the project. The company uses straight-line depreciation. The depreciation expense
will be $20,000 per year. Assume cash flows occur at the end of the year except for the initial
investments. The company takes income taxes into account in its capital budgeting. The income
tax rate is 30% and the after-tax discount rate is 8%.
Required:
195
Answer:
Year
Now 1 2 3 4
expense:
Sales $200,000 $200,000 $200,000 $200,000
Tax rate 30% 30% 30% 30%

value:
Sales $200,000 $200,000 $200,000 $200,000
Total cash flows $(110,000) $41,000 $41,000 $34,000 $71,000
Discount factor (8%) 1.000 0.926 0.857 0.794 0.735
Bloom's: Apply
196
136) Patenaude Corporation has provided the following information concerning a capital
budgeting project:

Tax rate 30%
Required:
197
Answer:
Year
Now 1 2 3
expense:
inflow $340,000 $340,000 $340,000
Tax rate 30% 30% 30%

inflow $340,000 $340,000 $340,000
Total cash flows $(710,000) $307,000 $251,000 $327,000
Discount factor (7%) 1.000 0.935 0.873 0.816
Bloom's: Apply
198
137) Cirillo Corporation is considering a capital budgeting project that involves investing
$660,000 in equipment that would have a useful life of 3 years and zero salvage value. The net
annual operating cash inflow, which is the difference between the incremental sales revenue and
incremental cash operating expenses, would be $350,000 per year. The company uses straight-
line depreciation and the depreciation expense on the equipment would be $220,000 per year.
takes income taxes into account in its capital budgeting. The income tax rate is 30%. The after-
tax discount rate is 6%.
Required:
Answer:
Year
Now 1 2 3
expense:
Tax rate 30% 30% 30%

Total cash flows $(660,000) $311,000 $311,000 $311,000
Discount factor (6%) 1.000 0.943 0.890 0.840
Difficulty: 1 Easy
Bloom's: Apply
199
138) Bellows Corporation is considering a capital budgeting project that would require investing
$80,000 in equipment with a 4 year useful life and zero salvage value. Data concerning that
project appear below:

in its capital budgeting. The company's tax rate is 30% and the after-tax discount rate is 11%.
Required:

= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
Now 1 2 3 4
expense:
Sales $170,000 $170,000 $170,000 $170,000
Tax rate 30% 30% 30% 30%

value:
Sales $170,000 $170,000 $170,000 $170,000
Total cash flows $(80,000) $41,000 $41,000 $27,000 $41,000
Discount factor (11%) 1.000 0.901 0.812 0.731 0.659
flows $(80,000) $36,941 $33,292 $19,737 $27,019
Bloom's: Apply
200
139) Debona Corporation is considering a capital budgeting project that would require investing
$80,000 in equipment with a 4 year useful life and zero salvage value. Annual incremental sales
would be $300,000 and annual incremental cash operating expenses would be $230,000. A one-
time expense of $30,000 for renovations would be required in year 3. The company uses straight-
line depreciation on all equipment. Assume cash flows occur at the end of the year except for the
initial investments. The company takes income taxes into account in its capital budgeting. The
Required:

= ($80,000 − $0) ÷ 4 years = $20,000 per year
Year
Now 1 2 3 4
expense:
Sales $300,000 $300,000 $300,000 $300,000
Tax rate 30% 30% 30% 30%

value:
Sales $300,000 $300,000 $300,000 $300,000
Total cash flows $(80,000) $55,000 $55,000 $34,000 $55,000
Discount factor (12%) 1.000 0.893 0.797 0.712 0.636
flows $(80,000) $49,115 $43,835 $24,208 $34,980
Bloom's: Apply
201
140) Shilt Corporation is considering a capital budgeting project that would require investing

in its capital budgeting. The company's tax rate is 30% and the after-tax discount rate is 13%.
Required:

= ($40,000 − $0) ÷ 4 years = $10,000 per year
Year
Now 1 2 3 4
expense:
Sales $120,000 $120,000 $120,000 $120,000
Tax rate 30% 30% 30% 30%

value:
Sales $120,000 $120,000 $120,000 $120,000
Total cash flows $(40,000) $17,000 $17,000 $17,000 $17,000
Discount factor (13%) 1.000 0.885 0.783 0.693 0.613
Difficulty: 1 Easy
Bloom's: Apply
202
141) Padmore Corporation has provided the following information concerning a capital
budgeting project:

Tax rate 30%
Required:
Answer:
Year
Now 1 2 3
Tax rate 30% 30% 30%

Total cash flows $(760,000) $310,000 $310,000 $350,000
Discount factor (6%) 1.000 0.943 0.890 0.840
Bloom's: Apply
203
142) Yau Corporation is considering a capital budgeting project that would require investing

An investment of $20,000 in working capital would be required immediately and would be

on all equipment. Assume cash flows occur at the end of the year except for the initial
investments. The company takes income taxes into account in its capital budgeting. The
Required:
204
= ($120,000 − $0) ÷ 4 years = $30,000 per year
Year
Now 1 2 3 4
expense:
Sales $360,000 $360,000 $360,000 $360,000
Tax rate 30% 30% 30% 30%

value:
Sales $360,000 $360,000 $360,000 $360,000
Total cash flows $(140,000) $86,000 $86,000 $51,000 $106,000
Discount factor (9%) 1.000 0.917 0.842 0.772 0.708
flows $(140,000) $78,862 $72,412 $39,372 $75,048
Bloom's: Apply
205
143) Hawthorn Corporation has provided the following information concerning a capital
budgeting project:

Tax rate 30%
Required:
Answer:
Year
Now 1 2 3
Tax rate 30% 30% 30%

Total cash flows $(510,000) $219,000 $177,000 $219,000
Discount factor (7%) 1.000 0.935 0.873 0.816
Bloom's: Apply
206
144) Olis Corporation is considering a capital budgeting project that would require investing
would be $690,000 and annual incremental cash operating expenses would be $480,000. The
company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of
capital budgeting. The company's tax rate is 30% and the after-tax discount rate is 8%.
Required:

= ($240,000 − $0) ÷ 4 years = $60,000 per year
Year
Now 1 2 3 4
expense:
Sales $690,000 $690,000 $690,000 $690,000
Tax rate 30% 30% 30% 30%

value:
Sales $690,000 $690,000 $690,000 $690,000
Total cash flows $(240,000) $165,000 $165,000 $165,000 $165,000
Discount factor (8%) 1.000 0.926 0.857 0.794 0.735
flows $(240,000) $152,790 $141,405 $131,010 $121,275
Difficulty: 1 Easy
Bloom's: Apply
207
145) Vore Corporation is considering a capital budgeting project that involves investing
$570,000 in equipment that would have a useful life of 3 years and zero salvage value. The net
annual operating cash inflow, which is the difference between the incremental sales revenue and
incremental cash operating expenses, would be $280,000 per year. The project would require a
one-time renovation expense of $60,000 at the end of year 2. The company uses straight-line
depreciation and the depreciation expense on the equipment would be $190,000 per year.
takes income taxes into account in its capital budgeting. The income tax rate is 30%. The after-
tax discount rate is 8%.
Required:
Answer:
Year
Now 1 2 3
Tax rate 30% 30% 30%

Total cash flows $(570,000) $253,000 $211,000 $253,000
Discount factor (8%) 1.000 0.926 0.857 0.794
Bloom's: Apply
208
146) Przewozman Corporation has provided the following information concerning a capital
budgeting project:

Tax rate 30%
Required:
209
= ($120,000 − $0) ÷ 4 years = $30,000 per year
Year
Now 1 2 3 4
expense:
Sales $290,000 $290,000 $290,000 $290,000
Tax rate 30% 30% 30% 30%

value:
Sales $290,000 $290,000 $290,000 $290,000
Total cash flows $(140,000) $65,000 $65,000 $37,000 $85,000
Discount factor (13%) 1.000 0.885 0.783 0.693 0.613
flows $(140,000) $57,525 $50,895 $25,641 $52,105
Bloom's: Apply
210
147) Sester Corporation has provided the following information concerning a capital budgeting
project:

Tax rate 30%
Required:
Answer:
Year
Now 1 2 3
Tax rate 30% 30% 30%

Total cash flows $(750,000) $327,000 $278,000 $327,000
Discount factor (7%) 1.000 0.935 0.873 0.816
Bloom's: Apply
211
148) Porco Corporation is considering a capital budgeting project that would require investing
would be $680,000 and annual incremental cash operating expenses would be $480,000. A one-
time expense of $90,000 for renovations would be required in year 3. An investment of $20,000
in working capital would be required immediately and would be released for use elsewhere at the
end of the project. The company uses straight-line depreciation on all equipment. Assume cash
taxes into account in its capital budgeting. The company's tax rate is 30% and the after-tax
discount rate is 12%.
Required:

= ($280,000 − $0) ÷ 4 years = $70,000 per year
Year
Now 1 2 3 4
expense:
Sales $680,000 $680,000 $680,000 $680,000
Tax rate 30% 30% 30% 30%

value:
Sales $680,000 $680,000 $680,000 $680,000
Total cash flows $(300,000) $161,000 $161,000 $98,000 $181,000
Discount factor (12%) 1.000 0.893 0.797 0.712 0.636
flows $(300,000) $143,773 $128,317 $69,776 $115,116
Bloom's: Apply
212
149) Roemen Corporation is considering a capital budgeting project that would require investing
would be $410,000 and annual incremental cash operating expenses would be $280,000. An
investment of $20,000 in working capital would be required immediately and would be released
for use elsewhere at the end of the project. The company uses straight-line depreciation on all
equipment. Assume cash flows occur at the end of the year except for the initial investments. The
company takes income taxes into account in its capital budgeting. The company's tax rate is 30%
and the after-tax discount rate is 12%.
Required:

= ($160,000 − $0) ÷ 4 years = $40,000 per year
Year
Now 1 2 3 4
expense:
Sales $410,000 $410,000 $410,000 $410,000
Tax rate 30% 30% 30% 30%

value:
Sales $410,000 $410,000 $410,000 $410,000
Total cash flows $(180,000) $103,000 $103,000 $103,000 $123,000
Discount factor (12%) 1.000 0.893 0.797 0.712 0.636
flows $(180,000) $91,979 $82,091 $73,336 $78,228
Bloom's: Apply
213
150) Newfield Corporation has provided the following information concerning a capital
budgeting project:

The company uses straight-line depreciation. The depreciation expense will be $30,000 per year.
takes income taxes into account in its capital budgeting. The income tax rate is 30% and the
after-tax discount rate is 13%.
Required:
Answer:
Year
Now 1 2 3 4
expense:
Sales $280,000 $280,000 $280,000 $280,000
Tax rate 30% 30% 30% 30%

value:
Sales $280,000 $280,000 $280,000 $280,000
Total cash flows $(120,000) $58,000 $58,000 $44,000 $58,000
Discount factor (13%) 1.000 0.885 0.783 0.693 0.613
Bloom's: Apply
214

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Managerial Accounting for Managers, 5e (Noreen)

The income tax expense in year 2:

= ($280,000 – $0) ÷ 4 years = $70,000 per year

The present value of this future cash flow is closest to:

After-tax net cash inflow = $20,000 – $6,000 = $14,000

Present value = 0.794 × $14,000 = $11,116

The net present value of the project is closest to:

The total cash flow net of income taxes in year 2 is:

= ($240,000 – $0) ÷ 4 years = $60,000 per year

Investment required in equipment $ 280,000

The total cash flow net of income taxes in year 3 is:

= ($120,000 – $0) ÷ 4 years = $30,000 per year

After-tax discount rate 15%

= ($120,000 – $0) ÷ 4 years = $30,000 per year

Cash sales $ 400,000

Tax rate 30%

The company uses straight-line depreciation on all equipment.

The total cash flow net of income taxes in year 2 is:

= ($160,000 – $0) ÷ 4 years = $40,000 per year

Tax rate 30%

The company uses straight-line depreciation on all equipment.

The income tax expense in year 3 is:

= ($160,000 – $0) ÷ 4 years = $40,000 per year

The company uses straight-line depreciation on all equipment.

The income tax expense in year 3 is:

= ($280,000 – $0) ÷ 4 years = $70,000 per year

The net present value of the project is closest to:

After-tax discount rate 12%

The company uses straight-line depreciation on all equipment.

The total cash flow net of income taxes in year 2 is:

= ($200,000 – $0) ÷ 4 years = $50,000 per year

After-tax discount rate 12%

The company uses straight-line depreciation on all equipment.

The income tax expense in year 3 is:

= ($280,000 – $0) ÷ 4 years = $70,000 per year

After-tax discount rate 13%

= ($80,000 – $0) ÷ 4 years = $20,000 per year

Tax rate 30%

The company uses straight-line depreciation on all equipment.

The total cash flow net of income taxes in year 3 is:

= ($240,000 – $0) ÷ 4 years = $60,000 per year

The company uses straight-line depreciation on all equipment.

The income tax expense in year 3 is:

= ($200,000 – $0) ÷ 4 years = $50,000 per year

After-tax discount rate 14%

= ($240,000 – $0) ÷ 4 years = $60,000 per year

After-tax discount rate 13%

The net present value of the project is closest to:

Investment required in equipment $ 80,000

The net present value of the project is closest to:

After-tax discount rate 12%

The company uses straight-line depreciation on all equipment.

The income tax expense in year 2 is:

= ($200,000 – $0) ÷ 4 years = $50,000 per year

The income tax expense in year 2 is:

= ($120,000 – $0) ÷ 4 years = $30,000 per year

Investment required in equipment $ 80,000

The total cash flow net of income taxes in year 2 is:

After-tax discount rate 9%

The company uses straight-line depreciation on all equipment.

The total cash flow net of income taxes in year 3 is:

= ($200,000 – $0) ÷ 4 years = $50,000 per year

After-tax discount rate 13%

Tax rate 30%