Han Rui Fam (Kelyn) (She_Her)'s Quiz History_ Week 4_ Test Your Knowledge (TYK)

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3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 1/12 Week 4: Test Your Knowledge (TYK) Results for Han Rui Fam (Kelyn) (She/Her) Score for this attempt: 20 out of 20 Submitted Mar 17 at 7:44pm This attempt took 7 minutes.  Question 1 1 / 1 pts Correct! $48,000 Correct Answers $48,000 48,000 48000 USD 48,000 The tax basis of $3000,000 (a loss) and the $160,000 cost to remove are deductible expenses, but the $40,000 scrap value is an offsetting cash inflow. Thus, the taxable loss is $420,000 ($300,000 + $160,000- $40,000). At a 40% tax rate, the $420,000 loss will produce a tax savings (inflow) of $168,000. Accordingly, the final cash flows will consist of an outflow of $160,000 (cost to remove) and inflows of $40,000 (scrap) and $168,000 (tax savings), a net inflow of $48,000.  Question 2 1 / 1 pts Discounted cash flow method. Chenco Incorporated is analyzing a capital investment proposal for a new machine to produce a product over the next 10 years. At the end of 10 years, the machine must be removed from the plant and will have a net carrying amount of $0, a tax basis of $300,000 (a loss), a cost to remove of $160,000, and scrap salvage value of $40,000. Chenco's effective tax rate is 40%. What is the appropriate "end-of-life" cash flow related to these items that should be used in the analysis? The length of time required to recover the initial investment in a capital project is determined by using the

3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 2/12 Correct! Payback method. Weighted net present value method. Net present value method. The payback method measures the number of years required to complete the return of the original investment. This measure is computed by dividing the net investment by the average expected cash inflows to be generated, resulting in the number of years required to recover the original investment. The payback method gives no consideration to the time value of money, and there is no consideration of returns after the payback period.  Question 3 1 / 1 pts Tax depreciation should be considered because it affects cash payments for taxes. Correct! Book depreciation is relevant because it affects net income. Sunk costs are not incremental flows and should not be included. Net working capital changes should be included in cash flow forecasts. Tax depreciation is relevant to cash flow analysis because it affects the amount of income taxes that must be paid. However, book depreciation is not relevant because it does not affect the amount of cash generated by an investment.  Question 4 1 / 1 pts Future operating cash savings. The current asset disposal price. Correct! The future asset depreciation expense. Which one of the following statements regarding cash flow determination for capital budgeting purposes is incorrect? Which of the following items is not included in discounted cash flow analysis?

3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 3/12 The tax effects of future asset depreciation. Discounted cash flow analysis, using either the internal rate of return (IRR) or the net present value (NPV) method, is based on the time value of cash inflows and outflows. All future operating cash savings are considered, as well as the tax effects on cash flows of future depreciation charges. The cash proceeds of future asset disposals are likewise a necessary consideration. Depreciation expense is a consideration only to the extent that it affects the cash flows for taxes. Otherwise, depreciation is excluded from the analysis because it is a noncash expense.  Question 5 1 / 1 pts Post-investment audits complete a stage in the capital budgeting process. Correct! Post-investment audits serve as a control mechanism. Post-investment audits allow the outcome of a project to be evaluated as soon as possible. Post-investment audits deter managers from proposing profitable investments. Post-investment audits should be conducted to serve as a control mechanism and to deter managers from proposing unprofitable investments. Actual-to-expected cash flow comparisons should be made, and unfavorable variances should be explained. Individuals who supplied unrealistic estimates should have to explain differences.  Question 6 1 / 1 pts The point where cumulative cash inflows on a project equal total cash outflows. Project investment ÷ annual net cash inflows. Annual fixed costs ÷ monthly contribution margin. Correct! Which of the following statements is true? In project investment analysis, breakeven time can be best described as

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3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 4/12 The point at which discounted cumulative cash inflows on a project equal discounted total cash outflows. Breakeven time is a capital budgeting tool that is widely used to evaluate the rapidity of new product development. It is the period required for the discounted cumulative cash inflows for a project to equal the discounted cumulative cash outflows. The concept is similar to the payback period, but it is more sophisticated because it incorporates the time value of money. It also differs from the payback method because the period covered begins at the outset of a project, not when the initial cash outflow occurs.  Question 7 1 / 1 pts Decrease the estimated effective income tax rate. Decrease the initial investment amount. Extend the project life and associated cash inflows. Correct! Increase the discount rate. An increase in the discount rate would lower the net present value, as would a decrease in cash flows or an increase in the initial investment.  Question 8 1 / 1 pts The net present value (NPV) of an investment project has been calculated to be $275,000. Which of the following event/scenario would decrease the NPV? Global Power Systems (GPS) is considering the acquisition of a new machine at a cost of $900,000. Transporting the machine to GPS’ manufacturing plant will cost $60,000. Installing the machine will cost an additional $90,000. It has a 10-year life and is expected to have a salvage value of $50,000. Furthermore, the machine is expected to produce 4,000 units per year with a selling price of $2,500 and combined direct materials and direct labor costs of $2,250 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. GPS has a marginal tax rate of 40%. What is the net cash flow for the third year that GPS should use in a capital budgeting analysis?

3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 5/12 Correct! $684,000 Correct Answers $684,000 684000 $684000 USD 684,000 USD 684000 The company will receive net cash inflows of $250 per unit ($2,500 selling price- $2,250 variable costs), a total of $1,000,000 per year for 4,000 units. This amount will be subject to taxation. However, for the first 5 years, a depreciation deduction of $210,000 per year ($1,050,000 cost ÷ 5 years) will be available. Thus, annual taxable income will be $790,000 ($1,000,000- $210,000). At a 40% tax rate, income tax expense will be $316,000, and the net cash inflow will be $684,000 ($1,000,000- $316,000).  Question 9 1 / 1 pts Correct! $72,000 Correct Answers $72,000 72000 USD 72,000 $72000 The project will have a $33,000 before-tax cash inflow from operations in the tenth year ($120,000 - $87,000). Also, $27,000 will be generated from the sale of the equipment. The entire $27,000 will be taxable because the basis of the asset was reduced to zero in the 7th year. Thus, taxable income will be Fuzhou Inc. is considering a 10-year capital investment project with forecasted revenues of $120,000 per year and forecasted cash operating expenses of $87,000 per year. The initial cost of the equipment for the project is $69,000, and Fuzhou expects to sell the equipment for $27,000 at the end of the tenth year. The equipment will be depreciated over 7 years. The project requires a working capital investment of $21,000 at its inception and another $15,000 at the end of Year 5. Assuming a 40% marginal tax rate, the expected net cash flow from the project in the tenth year is

3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 6/12 $60,000 ($33 ,000 + $27,000), leaving a net after-tax cash inflow of $36,000 [$60,000 x (1.0- .4)). To this $36,000 must be added the $36,000 tied up in working capital ($21,000 + $15,000). The total net cash flow in the 10th year will therefore be $72,000.  Question 10 1 / 1 pts I only. Correct! I & II. III only. I, II, & III. A common misstep in regard to capital budgeting is the temptation to gauge the desirability of a project by using accrual accounting numbers instead of cash flows. Net income and book value are affected by the company's choices of accounting methods. A project's true rate of return cannot be dependent on bookkeeping decisions. Another distortion inherent in comparing a single project's book rate of return to the current one for the company as a whole is that the latter is an average of all of a firm's capital projects. Embedded in that average number may be a handful of good projects making up for a large number of poor investments.  Question 11 1 / 1 pts Accounting rate of return is an unsatisfactory indicator to selecting capital projects because I. It uses accrual accounting numbers. II. It compares a single project against the average of capital projects. III. It uses cash flows to gauge the desirability of the project. American Industrial Manufacturing (AIM) is replacing an equipment purchased 5 years ago for $45,000 with a new one costing $75,000 cash. The original equipment is being depreciated on a straight-line basis over 15 years to a zero-salvage value; AIM will sell this old equipment to a third party for $18,000 cash. The new equipment will be depreciated on a straight-line basis over 10 years to a zero-salvage value. Assuming a 40% marginal tax rate, AIM's net cash investment at the time of purchase if the old equipment is sold and the new one purchased is

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3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 7/12 Correct! $52,200 Correct Answers 52,200 $52,200 USD 52,200 52200 The old equipment has a carrying amount of $30,000 [$45,000 cost- 5 ($45,000 cost ÷ 15 years) depreciation]. The loss on the sale is $12,000 ($30,000- $18,000 cash received), and the tax savings from the loss is $4,800 ($12,000 x 40%). Thus, total inflows are $22,800. The only outflow is the $75,000 purchase price of the new machine. The net cash investment is therefore $52,200 ($75,000- $22,800).  Question 12 1 / 1 pts Computed internal rate of return. Risk-free interest rate. Correct! Discount rate used in the NPV calculation. Firm's average rate of return. The NPV method is used when the discount rate is specified. It assumes that cash flows from the investment can be reinvested at the particular project's discount rate.  Question 13 1 / 1 pts Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project. NPV assumes that the project's cash flows are reinvested at the

3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 8/12 Is calculated using sensitivity analysis. Computes the true interest rate. Correct! Does not provide the true rate of return on investment. Is difficult to apply because it uses a trial-and-error approach. The NPV is broadly defined as the excess of the present value of the estimated net cash inflows over the net cost of the investment. A discount rate has to be stipulated by the person conducting the analysis. A disadvantage is that it does not provide the true rate of return for an investment, only that the rate of return is higher than a stipulated discount rate (which may be the cost of capital).  Question 14 1 / 1 pts An after-tax cash outflow. Correct! A reduction in income taxes. The cash provided by recording depreciation. The expense caused by depreciation. A tax shield is something that will protect income against taxation. Thus, a depreciation tax shield is a reduction in income taxes due to a company's being allowed to deduct depreciation against otherwise taxable income.  Question 15 1 / 1 pts Which of the following is a disadvantage of the net present value (NPV) method of capital expenditure evaluation? The term depreciation tax shield is best described as In project finance and capital budgeting, the term accounting rate of return

3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 9/12 Is synonymous with the internal rate of return. Is discounted using the firm’s weighted average cost of capital. Recognizes the time value of money. Correct! Focuses on income as opposed to cash flows. The accounting rate of return (also called the unadjusted rate of return or book value rate of return) is calculated by dividing the increase in accounting net income by the required investment. Sometimes the denominator is the average investment rather than the initial investment. This method ignores the time value of money and focuses on income as opposed to cash flows.  Question 16 1 / 1 pts Unadjusted rate of return model. Accounting rate of return model. Payback model. Correct! Discounted cash flow model. The capital budgeting methods that are generally considered the best for long-range decision making are the internal rate of return and net present value methods. These are both discounted cash flow methods.  Question 17 1 / 1 pts Which of the following capital budgeting models is generally considered the best for long-range decision making? Heritage Group, Inc. is considering the acquisition of a new equipment. The equipment can be purchased for $270,000; it will cost $18,000 to transport to Heritage's manufacturing plant and $27,000 to install. It is estimated that the equipment will last 10 years, and it is expected to have an estimated salvage value of $15,000. Over its 10-year life, the equipment is expected to produce 6,000 units per year with a selling price of $1,500 and combined material and labor costs of $1,350 per unit. Federal tax regulations permit equipment of this type to be depreciated using the straight-line method over 5 years

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3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 10/12 Correct! $315,000 Correct Answers $(315,000) $315,000 $315000 315000 Initially, the company must invest $315,000 in the machine, consisting of the invoice price of $270,000, the delivery costs of $18,000, and the installation costs of $27,000.  Question 18 1 / 1 pts Discretionary cost. Full absorption cost. Total variable cost. Correct! Sunk cost. A sunk cost cannot be avoided because it represents an expenditure that has already been made or an irrevocable decision to incur the cost.  Question 19 1 / 1 pts with no estimated salvage value. Heritage has a marginal tax rate of 40%. What is the net cash outflow at the beginning of the first year that Heritage should use in a capital budgeting analysis? The term used to refer to costs incurred in the past that are irrelevant to a future decision is

3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 11/12 The lives of the multiple projects are equal, and the size of the required investments are equal. The required rate of return equals the IRR of each project. The required rate of return is higher than the IRR of each project. Correct! Multiple projects have unequal lives and the size of the investment for each project is different. The two methods ordinarily yield the same results, but differences can occur when the duration of the projects and the initial investments differ. The reason is that the IRR method assumes cash inflows from the early years will be reinvested at the internal rate of return. The NPV method assumes that early cash inflows are reinvested at the NPV discount rate.  Question 20 1 / 1 pts Correct! $60,000 Correct Answers $60,000 $60000 60000 USD 60,000 The tax basis of $375,000 and the $200,000 cost to remove can be written off. However, the $50,000 scrap value is a cash inflow. Thus, the taxable loss is $525,000. ($375,000 loss on disposal + $200,000 expense to remove - $50,000 of inflows). At a 40% tax rate, the $105,000 loss will produce a tax savings The rankings of mutually exclusive projects determined using the internal rate of return technique (IRR) and the net present value method (NPV) may be different when Global Industrial Manufacturing (GIM) is analyzing a capital investment proposal for new equipment to produce a product over the next 10 years. The analyst is attempting to determine the appropriate "end- of-life” cash flows for the analysis. At the end of 10 years, the equipment must be removed from the plant and will have a net book value of zero, a tax basis of $375,000, a cost to remove of $200,000, and scrap salvage value of $50,000. GIM's effective tax rate is 40%. What is the appropriate "end-of-life" cash flow related to these items that should be used in the analysis?

3/28/24, 5:34 PM Han Rui Fam (Kelyn) (She/Her)'s Quiz History: Week 4: Test Your Knowledge (TYK) https://northeastern.instructure.com/courses/165089/quizzes/582938/history?version=3 12/12 (inflow) of $42,000. The final cash flows will consist of an outflow of $200,000 (cost to remove) and inflows of $50,000 (scrap) and $210,000 (tax savings), or a net inflow of $60,000. Quiz Score: 20 out of 20

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