FIN 3400 Ch 12 SMARTBOOK - Complete Solutions (Verified)

FIN 3400 Ch 12 SMARTBOOK - Complete Solutions (Verified) In 4 years, an existing machine will have a zero book value and a market value of $4,200. A new machine costing $26,400 can replace this machine, lower variable costs by $8,200 a year, and have a market value of $13,300 and a zero book value in 4 years. The incremental depreciation is $5,300. The tax rate is 35%. What is the operating cash flow for year 4? $7,185 Rationale: OCF = ($8,200 - $5,300)(1 - 0.35) + $5,300 = $7,185 A firm purchased equipment at a total cost of $300,000, which was depreciated straight-line over six years. After six years, the equipment was sold for $100,000. What is the ATCF at a tax rate of 21%? $79,000 Rationale: Book value = $300,000 - (6/6 × $300,000) = $0; ATCF = $0 + ($100,000 - $0)(1 - 0.21) = $79,000 A project has a 3-year life and annual sales projections of $120,000, $160,000 and $190,000 for years 1 to 3, respectively. The project requires net working capital (NWC) equal to 5 percent of the next year's sales. How is this requirement handled in project analysis? Select all that apply. A cash outflow of [0.05 × ($160,000 - $120,000)] is recorded in year 1. A cash inflow of (0.05 × $190,000) occurs in year 3. A cash outflow of (0.05 × $120,000) is recorded at time zero. A project requires $21,000 of net working capital (NWC) over its 4-year life. Which one of these is correct? There is no cash flow for NWC in years 1 to 3. Rationale: There is a $21,000 outflow at time zero and a $21,000 inflow in year 4. A project requires $15,000 of net working capital throughout its 5-year life. How is this requirement handled in project analysis? Select all that apply. $15,000 is a cash inflow in year 5. $15,000 is a cash outflow at time zero. A project has a 3-year life and requires equipment costing $34,000. The OCF is estimated at $16,000 annually. NWC of $3,500 is required over the project's life. What cash flows occur at time zero? Select all that apply. -$3,500 -$34,000 A project has a 3-year life, net income of $10,000 a year, and a tax rate of 21%. The project requires $9,000 of equipment which will be depreciated straight-line over 3 years, and have a market value of $3,000 at the end of year 3. The NWC requirement is $1,500 which is returned at the end of year 3. What is the total cash flow for year 3? $16,871 Rationale: OCF = $10,000 + ($9,000/3) = $13,000; Book value at the end of year 3 = $0 ATCF = $0 + ($3,000 - $0)(1 - 0.21) = $2,371 Year 2 cash flow = $13,000 + $1,500 + $2,371 = $16,871 Over how many tax years will a 3-year asset be depreciated given the half-year convention? 4 years Rationale: Given the half-year convention, a 3-year asset will be depreciated over 4 years. A new project requires $24,000 of equipment which will be depreciated straight-line to zero over the project's 4-year life. The project requires $2,400 of NWC, the annual OCF is $16,000, and the tax rate is 35 percent. The equipment's market value at the end of year 4 is $5,000. What cash flows occur in year 4? Select all that apply. $5,000 × (1 - 0.35) $2,400 An asset has a 3-year life and a depreciable basis of $16,400. What is the depreciation in year 4 given straight-line depreciation with half-year convention. The depreciation table percentages are 16.67, 33.33, 33.33, and 16.67 percent for years 1 to 4, respectively. $2,733.88 Rationale: Depreciation Year 4 = 0.1667 × $16,400 = $2,733.88 A project has a 2-year life, net income of $14,500 a year, and a tax rate of 34 percent. The project requires $6,000 of equipment which will be depreciated straight-line over 3 years, and have a market value of $2,500 at the end of year 2. The NWC requirement is $1,500. What is the total cash flow for year 2? $20,330 Rationale: OCF = $14,500 + ($6,000/3) = $16,500; Book value at the end of year 2 = $6,000/3 = $2,000; ATCF = $2,000 + ($2,500 - $2,000)(1 - 0.34) = $2,330; Year 2 cash flow = $16,500 + $1,500 + $2,330 = $20,330 The half-year convention is based on which of these assumptions? All assets placed in service during a given period were placed in service at the mid-point of the period. An asset has a 4-year life and a depreciable basis of $12,000. What is the first year's depreciation given the straight-line method with half-year convention? The depreciation table percentages are 12.5, 25, 25, 25, and 12.5 for years 1 through 5, respectively. $1,500 Rationale: Depreciation Year 1 = 0.125 × $12,000 = $1,500 What does accelerated depreciation indicate? Depreciation in the first half of an asset's life is greater than half of the assets value. Why would a firm prefer to use MACRS rather than straight-line depreciation for tax purposes? The tax deduction from depreciation is greater in the early years. Rationale: The greater the depreciation, the lower the taxes. An asset cost $52,000, has a 5-year MACRS life, and a current book value of $41,600. The MACRS percentages for years 1 to 6 are 20, 32, 19.2, 11.52, 11.52, and 5.76 percent, respectively. What is the depreciation for year 2? $16,640 Rationale: Depreciation Year 2 = 0.32 × $52,000 = $16,640 Which one of these represents a limit placed on Section 179 deductions? Taxable income from the active conduct of the firm What is the double-declining balance (DDB) method of depreciation? The depreciation rate is 200 percent of the straight-line rate with the rate applied to the current book value. Which one of these is a feature of MACRS depreciation? Depreciation commences with an accelerated method and later switches to a straight-line method. Which one of these is property eligible for a Section 179 deduction? A cow barn that you build on your farm Rationale: This is a single-purpose agricultural structure, which is eligible. An asset has an initial cost of $43,000 and is classified as 3- year MACRS property. The MACRS