Managerial Accounting, 16e (Garrison)
Chapter 13C: 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.
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.
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.
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.
5) Income taxes have no effect on whether a capital budgeting project should or should not be
accepted in a for-profit company.
6) A capital budgeting project’s incremental net income computation for purposes of determining
incremental tax expense includes investments in working capital.
7) The investment in working capital at the start of an investment project can be deducted from
revenues when computing taxable income.
8) All cash inflows are taxable.
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.
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.
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
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%.
See separate Exhibit 13B-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
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%.
See separate Exhibit 13B-1 to determine the appropriate discount factor(s) using table.
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
8
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.
See separate Exhibit 13B-1 to determine the appropriate discount factor(s) using table.
The net present value of the project is closest to:
A) $178,252
B) $252,000
C) $97,040
D) $134,168
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
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.
See separate Exhibit 13B-1 to determine the appropriate discount factor(s) using table.
The net present value of the project is closest to:
A) $176,900
B) $182,000
C) $84,770
D) $92,770
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.
The total cash flow net of income taxes in year 3 is:
A) $44,000
B) $35,000
C) $65,000
D) $50,000
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
Investment required in equipment
$
120,000
Salvage value of equipment
$
0
Annual sales
$
260,000
Annual cash operating expenses
$
180,000
One-time renovation expense in year 3
$
30,000
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.
See separate Exhibit 13B-1 to determine the appropriate discount factor(s) using table.
The net present value of the project is closest to:
A) $65,640
B) $119,000
C) $171,822
D) $51,822
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
20) Coffie Corporation has provided the following information concerning a capital budgeting
project:
Tax rate
30
%
Expected life of the project
4
Investment required in equipment
$
160,000
Salvage value of equipment
$
0
Annual sales
$
440,000
Annual cash operating expenses
$
310,000
The company uses straight-line depreciation on all equipment.
The total cash flow net of income taxes in year 2 is:
A) $90,000
B) $75,000
C) $130,000
D) $103,000
Calculate the annual tax expense:
Sales
$
Cash operating expenses
$
(310,000
)
Depreciation expense
$
)
Incremental net income
$
Tax rate
%
Income tax expense
$
Sales
$
Cash operating expenses
$
(310,000
)
Income tax expense
$
Total cash flows
$
17
21) Bonomo Corporation has provided the following information concerning a capital budgeting
project:
Tax rate
30
%
Expected life of the project
4
Investment required in equipment
$
160,000
Salvage value of equipment
$
0
Annual sales
$
420,000
Annual cash operating expenses
$
300,000
One-time renovation expense in year 3
$
50,000
The company uses straight-line depreciation on all equipment.
The income tax expense in year 3 is:
A) $24,000
B) $15,000
C) $36,000
D) $9,000
Calculate the annual tax expense:
Sales
420,000
Cash operating expenses
)
One-time expense
(50,000
)
Depreciation expense
(40,000
)
Incremental net income
Tax rate
%
Income tax expense
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%.
The company uses straight-line depreciation on all equipment.
The income tax expense in year 3 is:
A) $15,000
B) $9,000
C) $7,000
D) $36,000
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.
See separate Exhibit 13B-1 to determine the appropriate discount factor(s) using table.
The net present value of the project is closest to:
A) $22,800
B) $125,664
C) $56,000
D) $5,664
24) Infante Corporation has provided the following information concerning a capital budgeting
project:
After-tax discount rate
12
%
Tax rate
30
%
Expected life of the project
4
Investment required in equipment
$
200,000
Salvage value of equipment
$
0
Working capital requirement
$
20,000
Annual sales
$
480,000
Annual cash operating expenses
$
390,000
One-time renovation expense in year 3
$
30,000
The company uses straight-line depreciation on all equipment.
The total cash flow net of income taxes in year 2 is:
A) $78,000
B) $63,000
C) $92,000
D) $42,000