14) The advantage of MACRS over straight-line depreciation is that you can write off more of
your capital costs in the ________ years.
A) middle
B) last
C) later
D) earlier
15) The advantage of straight-line depreciation over MACRS depreciation is that you can write
off ________.
A) more of your total capital costs
B) your capital costs in fewer years
C) a larger percentage of your capital costs earlier
D) None of the above
16) The accelerated write-off of capital costs in MACRS depreciation provides a taxable expense
that reduces taxes at a faster rate than with straight-line depreciation. Therefore, according to
________ concepts, we can surmise that bigger tax cuts in the earlier years and lower tax cuts in
the later years are better than a steady tax cut each year.
A) time-value of money
B) depreciation and sunk costs
C) depreciation and opportunity costs
D) interest rate
17) The ________ a capital asset is NOT part of the MACRS and is ignored for depreciation
expense.
A) salvage value of
B) dividends paid from
C) inventory from
D) straight-line value of
18) Termination is the process of “expiring” the cost of a long-term tangible asset over its useful
life.
19) The annual straight-line depreciation expense is the total value (cost plus installation) minus
any anticipated salvage value divided by the number of years of service (life) of the machine.
20) MACRS allocates the same amount of cost each period as determined by the total initial cost
divided by the number of years of useful life of the machines.
21) MACRS stands for modified accelerated cost recovery system and classifies the “life” of
every asset for use in determining the depreciation expense each year.
22) Briefly describe straight-line depreciation.
23) Briefly describe MACRS depreciation.
1) When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated, based on the
________ of the asset at the time of disposal.
A) book value only
B) market value only
C) difference in book and market values
D) difference in market value and salvage value
2) When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated, based on the
book value of the asset at the time of disposal. If a ________ has occurred, ________ are
incurred.
A) gain, tax reductions
B) gain, taxes
C) gain, tax credits
D) loss, taxes
3) When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated, based on the
book value of the asset at the time of disposal. If a ________ has occurred, a ________ is
recorded.
A) gain, tax credit
B) gain, tax reduction
C) loss, tax credit
D) loss, tax increase
4) The current book value of an asset serves as the basis for determining the gain or loss
________.
A) at retention
B) at book value
C) at market value
D) at disposal
5) A gain on disposal is recognized when the selling price of the asset is ________ the book
value.
A) greater than
B) equal to
C) less than
D) greater than or equal to
6) A loss on disposal is recognized when the selling price of the asset is ________ the book
value.
A) greater than
B) equal to
C) less than
D) less than or equal to
7) Which of the statements below is FALSE?
A) The current book value of an asset serves as the basis for determining the gain or loss at
disposal.
B) Book value is the original cost of the asset plus the accumulated depreciation.
C) A gain on disposal is recognized when the selling price of the asset is greater than the book
value.
D) A loss on disposal is recognized when the selling price of the asset is less than the book value.
8) Eastern Inc. purchases a machine for $15,000. This machine qualifies as a five-year recovery
asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2
= 32.00%; year 3 = 19.20%; year 4 = 11.52%. Eastern has a tax rate of 20%. If the machine is
sold at the end of four years for $4,000, what is the cash flow from disposal?
A) $3,718.40
B) $3,535.36
C) $2,592.00
D) $1,408.00
9) Western Inc. purchases a machine for $70,000. This machine qualifies as a five-year recovery
asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2
= 32.00%; year 3 = 19.20%; year 4 = 11.52%. The firm has a tax rate of 20%. If the machine is
sold at the end of two years for $50,000, what is the cash flow from disposal?
A) $50,000
B) $46,720
C) $43,440
D) $33,600
10) Northern Inc. purchases an asset for $150,000. This asset qualifies as a five-year recovery
asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2
= 32.00%; year 3 = 19.20%; year 4 = 11.52%. The firm has a tax rate of 20%. If the asset is sold
at the end of four years for $40,000, what is the cash flow from disposal?
A) $36,089
B) $37,184
C) $34,931
D) $335,072
11) Southern Co. purchases an asset for $50,000. This asset qualifies as a five-year recovery
asset under MACRS, with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2
= 32.00%; year 3 = 19.20%; year 4 = 11.52%. Southern has a tax rate of 20%. If the asset is sold
at the end of four years for $5,000, what is the after-tax cash flow from disposal?
A) $3,535.36
B) $6,274.00
C) $2,592.00
D) $5,728.00
12) Fully depreciated assets ________, and so any proceeds from sale at disposal are taxable
gains.
A) always have a market value of zero
B) have a positive book value
C) have a negative market value
D) have a book value of zero
13) Which is NOT a step in the estimation of after-tax cash flow at disposal?
A) If selling price is greater than book value: Selling Price – Tax on Gain.
B) If selling price is less than book value: Selling Price + Tax Credit on Loss.
C) If book value is less than selling price: Selling Price + Tax Credit on Loss.
D) If selling price equals book value: Selling Price.
14) The tax rules for depreciation recapture are much more ________ than a simplified approach
for disposal.
A) basic
B) complicated
C) easy
D) shortened
15) If the selling price of an asset at disposal is greater than its book value, then the after-tax cash
flow is the selling price minus the tax on the gain.
16) If the selling price of an asset at disposal is less than its book value, then the after-tax cash
flow is the selling price minus the tax on the gain.
17) The current book value of an asset serves as the basis for determining the gain or loss at
disposal.
18) Book value is the original cost of an asset plus the accumulated depreciation.
19) Fully depreciated assets have a positive book value, and so any proceeds from sale at
disposal are taxable gains.
20) Southwest Co. purchases an asset for $60,000. This asset qualifies as a seven-year recovery
asset under MACRS. Winston has a tax rate of 30%. The seven-year fixed depreciation
percentages for years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and
8.93%, respectively. If the asset is sold at the end of six years for $10,000, what is the cash flow
from disposal?
21) Northwest Co. purchases an asset for $6,000. This asset qualifies as a seven-year recovery
asset under MACRS. Benson has a tax rate of 30%. The seven-year expense percentages for
years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively.
If the asset is sold at the end of six years for $2,000, what is the cash flow from disposal?
1) To project the appropriate anticipated cash flow for a project, we must put all cash flow
knowledge together. This includes ________ of the incremental cash flow.
A) both the amount and timing
B) the amount
C) the timing
D) the amount but not the timing
2) When computing the total cash outflow needed to start a project, we must include ________.
A) any change in net income
B) any change in working capital
C) any change in dividends
D) any change in earnings
3) We assume no ________ costs for a project if a competitor is also introducing a competing
product.
A) sunk
B) buyback
C) erosion
D) corrosion
4) Once the operations for a new project are up and running, we need to estimate the cash flow
from ________.
A) sunk costs
B) flotation costs
C) depreciation
D) operations
5) We can use the ________ to estimate a project’s operating cash flows each period.
A) modified income statement format
B) income statement format
C) balance sheet format
D) annual report format
6) The financial manager needs help in producing the best estimates of the future costs of
production. Where does this help come from?
A) Marketing manager
B) Production manager
C) Human resources manager
D) All of these
7) If we know the ________ and the EBIT, we can estimate the taxes for a project for the year.
A) MACRS percentage
B) sunk costs
C) tax rate
D) salvage value
8) At the end of a project’s life, we will recover any initial changes in ________ from the
beginning of the project.
A) working capital
B) depreciation
C) taxes
D) start-up costs
9) The remaining book value when a project is terminated is the ________ minus accumulated
depreciation over the life of the project.
A) original cost
B) ending cost
C) salvage cost
D) sunk cost
10) If an asset’s disposal value is less than its ________, a loss on disposal occurs.
A) original market value
B) current book value
C) initial cost or original book value
D) current market value
11) If an asset’s ________ is greater than its current book value, a gain on disposal occurs.
A) original book value
B) amount of depreciation
C) disposal value
D) original market value
12) Cash flow at disposal of an asset can be calculated as the disposal value plus the ________
on the loss.
A) alternative minimum tax
B) statutory tax
C) tax shield
D) tax credit
13) The building of the ________ cash flow of a project is the cornerstone of the financial
decision models.
A) depreciation
B) incremental
C) accounting
D) tax
14) A financial manager examines concepts such as sunk costs, opportunity costs, and erosion
costs to help understand how to estimate the incremental cash flow of a project, which is
________.
A) the extra money the firm pays from taking on more inventory
B) the additional money the firm receives from taking on a new project
C) the prior money the firm receives from taking on a new project
D) the additional money the firm receives from its choice of financing
15) One examines concepts such as sunk costs, opportunity costs, and erosion costs to help
understand how to estimate the incremental cash flow of a project.
16) If an asset’s disposal value is greater than its current book value, a gain on disposal occurs.
17) The six financial decision models that you studied in Chapter 9 are valid only if one has the
proper incremental cash flow for the project under consideration.
18) The output of the capital budgeting decision models is only as good as the inputs that go into
them.
19) What is an incremental cash flow for a project? What concepts do we need to examine to
help understand how to estimate the incremental cash flow of a project? What else is needed for
deciding whether or not to choose a project?