Hock P2 2020
Section E - Investment Decisions.
Questions
Section E - Investment Decisions.
Capital Budgeting Process 47
Payback Method 18
Time Value of Money, Discounted Payback, and Net Present Value 57
Choice of Discount Rate, Internal Rate of Return 18
Capital Budgeting Methods-Other Topics 28
Risk in Capital Budgeting 14
182
Capital Budgeting Process
1. Question ID: ICMA 10.P2.284 (Topic: Capital Budgeting Process)
Which one of the following items is least likely to directly impact an equipment
replacement capital expenditure decision?
A. The sales value of the asset that is being replaced.
B. The depreciation rate that will be used for tax purposes on the new asset.
C. The amount of additional accounts receivable that will be generated from increased
production and sales.
D. The net present value of the equipment that is being replaced.
2. Question ID: ICMA 1603.P2.070 (Topic: Capital Budgeting Process)
A company installed a piece of equipment with a 5-year life and no salvage value. The
new equipment costs $500,000 and will generate $150,000 in savings each year. Old
equipment with a book value of $50,000 and a remaining life of 2 years was sold for
$20,000. No changes in working capital are anticipated. The effective income tax rate is
40%. The total initial investment for the new equipment is
A. $500,000.
B. $450,000.
C. $468,000.
D. $550,000.
3. Question ID: CMA 1295 4.8 (Topic: Capital Budgeting Process)
Lawson Inc. is expanding its manufacturing plant, which requires an investment of $4
million in new equipment and plant modifications. Lawson's sales are expected to
increase by $3 million per year as a result of the expansion. Cash investment in current
assets averages 30% of sales; accounts payable and other current liabilities are 10% of
sales. What is the estimated total investment for this expansion?
A. $4.3 million.
, Hock P2 2020
Section E - Investment Decisions.
Questions
B. $4.9 million.
C. $4.6 million.
D. $3.4 million.
4. Question ID: ICMA 19.P2.027 (Topic: Capital Budgeting Process)
A capital investment project has the following expected incremental values next year.
Revenue $1,000,000
Operating costs 200,000
Depreciation 300,000
If the income tax rate is 25%, the incremental after-tax operating cash flow is
A. $675,000.
B. $375,000.
C. $125,000.
D. $900,000.
5. Question ID: ICMA 1603.P2.041 (Topic: Capital Budgeting Process)
The management of a company is considering making a capital investment to acquire a
machine for its manufacturing facility at a total cost of €600,000 for equipment and
installation. The machine has a useful life of 5 years and a zero salvage value at the
end of its useful life. The management of the company uses the straight-line
depreciation method for all machinery acquired. How much would the company’s annual
tax savings be upon acquiring the machine if the company’s income tax rate is 30%?
A. €180,000.
B. €36,000.
C. €120,000.
D. €84,000.
6. Question ID: ICMA 19.P2.028 (Topic: Capital Budgeting Process)
All of the following would increase the present value of the incremental tax savings
associated with the depreciation of an asset except a decrease in the
A. marginal income tax rate.
B. discount rate.
C. useful life of the asset.
D. salvage value of the asset.
, Hock P2 2020
Section E - Investment Decisions.
Questions
7. Question ID: CMA 1277 5.14 (Topic: Capital Budgeting Process)
Depreciation is incorporated explicitly in the discounted cash flow analysis of an
investment proposal because it
A. Is a cash inflow.
B. Represents the initial cash outflow spread over the life of the investment.
C. Is a cost of operations that cannot be avoided.
D. Reduces the cash outlay for income taxes.
8. Question ID: CMA 689 1.25 (Topic: Capital Budgeting Process)
All of the following are examples of imputed costs except
A. Assets that are considered obsolete that maintain a net book value.
B. The stated interest paid on a bank loan.
C. Lending funds to a supplier at a lower-than-market rate in exchange for receiving the
supplier's products at a discount.
D. Decelerated depreciation.
9. Question ID: ICMA 10.P2.283 (Topic: Capital Budgeting Process)
Capital investment projects include proposals for all of the following except
A. the acquisition of government mandated pollution control equipment.
B. the expansion of existing product offerings.
C. additional research and development facilities.
D. refinancing existing working capital agreements.
10. Question ID: CMA 1295 4.5 (adapted) (Topic: Capital Budgeting Process)
The Moore Corporation is considering the acquisition of a new machine. The machine
can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and
$9,000 to install. It is estimated that the machine will last 10 years, and it is expected to
have an estimated salvage value of $5,000. Over its 10-year life, the machine is
expected to produce 2,000 units per year with a selling price of $500 and combined
material and labor costs of $450 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. Moore has a marginal tax rate of 40%.
What is the net cash flow for the tenth year of the project that Moore Corporation should
use in a capital budgeting analysis?
A. $100,000
B. $63,000
, Hock P2 2020
Section E - Investment Decisions.
Questions
C. $68,400
D. $65,000
11. Question ID: CMA 696 4.18 (Topic: Capital Budgeting Process)
Which one of the following is most relevant to a manufacturing equipment replacement
decision?
A. A lump-sum write-off amount from the disposal of the old equipment.
B. Original cost of the old equipment.
C. Gain or loss on the disposal of the old equipment.
D. Disposal price of the old equipment.
12. Question ID: ICMA 10.P2.292 (Topic: Capital Budgeting Process)
Kell Inc. is analyzing an investment for a new product expected to have annual sales of
100,000 units for the next 5 years and then be discontinued. New equipment will be
purchased for $1,200,000 and cost $300,000 to install. The equipment will be
depreciated on a straight-line basis over 5 years for financial reporting purposes and 3
years for tax purposes. At the end of the fifth year, it will cost $100,000 to remove the
equipment, which can be sold for $300,000. Additional working capital of $400,000 will
be required immediately and needed for the life of the product. The product will sell for
$80, with direct labor and material costs of $65 per unit. Annual indirect costs will
increase by $500,000. Kell's effective tax rate is 40%.
In a capital budgeting analysis, what is the cash outflow at time 0 (initial investment) that
Kell should use to compute the net present value?
A. $1,300,000.
B. $1,900,000.
C. $1,700,000.
D. $1,500,000.
13. Question ID: ICMA 19.P2.029 (Topic: Capital Budgeting Process)
At the conclusion of a capital budgeting project, a piece of equipment is expected to be
sold for $500,000. At the time of sale, the book value of the equipment would be
$400,000. If the income tax rate is 35%, what is the after-tax cash flow from the sale of
the machine?
A. $325,000.
B. $400,000.
C. $535,000.
D. $465,000.
Section E - Investment Decisions.
Questions
Section E - Investment Decisions.
Capital Budgeting Process 47
Payback Method 18
Time Value of Money, Discounted Payback, and Net Present Value 57
Choice of Discount Rate, Internal Rate of Return 18
Capital Budgeting Methods-Other Topics 28
Risk in Capital Budgeting 14
182
Capital Budgeting Process
1. Question ID: ICMA 10.P2.284 (Topic: Capital Budgeting Process)
Which one of the following items is least likely to directly impact an equipment
replacement capital expenditure decision?
A. The sales value of the asset that is being replaced.
B. The depreciation rate that will be used for tax purposes on the new asset.
C. The amount of additional accounts receivable that will be generated from increased
production and sales.
D. The net present value of the equipment that is being replaced.
2. Question ID: ICMA 1603.P2.070 (Topic: Capital Budgeting Process)
A company installed a piece of equipment with a 5-year life and no salvage value. The
new equipment costs $500,000 and will generate $150,000 in savings each year. Old
equipment with a book value of $50,000 and a remaining life of 2 years was sold for
$20,000. No changes in working capital are anticipated. The effective income tax rate is
40%. The total initial investment for the new equipment is
A. $500,000.
B. $450,000.
C. $468,000.
D. $550,000.
3. Question ID: CMA 1295 4.8 (Topic: Capital Budgeting Process)
Lawson Inc. is expanding its manufacturing plant, which requires an investment of $4
million in new equipment and plant modifications. Lawson's sales are expected to
increase by $3 million per year as a result of the expansion. Cash investment in current
assets averages 30% of sales; accounts payable and other current liabilities are 10% of
sales. What is the estimated total investment for this expansion?
A. $4.3 million.
, Hock P2 2020
Section E - Investment Decisions.
Questions
B. $4.9 million.
C. $4.6 million.
D. $3.4 million.
4. Question ID: ICMA 19.P2.027 (Topic: Capital Budgeting Process)
A capital investment project has the following expected incremental values next year.
Revenue $1,000,000
Operating costs 200,000
Depreciation 300,000
If the income tax rate is 25%, the incremental after-tax operating cash flow is
A. $675,000.
B. $375,000.
C. $125,000.
D. $900,000.
5. Question ID: ICMA 1603.P2.041 (Topic: Capital Budgeting Process)
The management of a company is considering making a capital investment to acquire a
machine for its manufacturing facility at a total cost of €600,000 for equipment and
installation. The machine has a useful life of 5 years and a zero salvage value at the
end of its useful life. The management of the company uses the straight-line
depreciation method for all machinery acquired. How much would the company’s annual
tax savings be upon acquiring the machine if the company’s income tax rate is 30%?
A. €180,000.
B. €36,000.
C. €120,000.
D. €84,000.
6. Question ID: ICMA 19.P2.028 (Topic: Capital Budgeting Process)
All of the following would increase the present value of the incremental tax savings
associated with the depreciation of an asset except a decrease in the
A. marginal income tax rate.
B. discount rate.
C. useful life of the asset.
D. salvage value of the asset.
, Hock P2 2020
Section E - Investment Decisions.
Questions
7. Question ID: CMA 1277 5.14 (Topic: Capital Budgeting Process)
Depreciation is incorporated explicitly in the discounted cash flow analysis of an
investment proposal because it
A. Is a cash inflow.
B. Represents the initial cash outflow spread over the life of the investment.
C. Is a cost of operations that cannot be avoided.
D. Reduces the cash outlay for income taxes.
8. Question ID: CMA 689 1.25 (Topic: Capital Budgeting Process)
All of the following are examples of imputed costs except
A. Assets that are considered obsolete that maintain a net book value.
B. The stated interest paid on a bank loan.
C. Lending funds to a supplier at a lower-than-market rate in exchange for receiving the
supplier's products at a discount.
D. Decelerated depreciation.
9. Question ID: ICMA 10.P2.283 (Topic: Capital Budgeting Process)
Capital investment projects include proposals for all of the following except
A. the acquisition of government mandated pollution control equipment.
B. the expansion of existing product offerings.
C. additional research and development facilities.
D. refinancing existing working capital agreements.
10. Question ID: CMA 1295 4.5 (adapted) (Topic: Capital Budgeting Process)
The Moore Corporation is considering the acquisition of a new machine. The machine
can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and
$9,000 to install. It is estimated that the machine will last 10 years, and it is expected to
have an estimated salvage value of $5,000. Over its 10-year life, the machine is
expected to produce 2,000 units per year with a selling price of $500 and combined
material and labor costs of $450 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. Moore has a marginal tax rate of 40%.
What is the net cash flow for the tenth year of the project that Moore Corporation should
use in a capital budgeting analysis?
A. $100,000
B. $63,000
, Hock P2 2020
Section E - Investment Decisions.
Questions
C. $68,400
D. $65,000
11. Question ID: CMA 696 4.18 (Topic: Capital Budgeting Process)
Which one of the following is most relevant to a manufacturing equipment replacement
decision?
A. A lump-sum write-off amount from the disposal of the old equipment.
B. Original cost of the old equipment.
C. Gain or loss on the disposal of the old equipment.
D. Disposal price of the old equipment.
12. Question ID: ICMA 10.P2.292 (Topic: Capital Budgeting Process)
Kell Inc. is analyzing an investment for a new product expected to have annual sales of
100,000 units for the next 5 years and then be discontinued. New equipment will be
purchased for $1,200,000 and cost $300,000 to install. The equipment will be
depreciated on a straight-line basis over 5 years for financial reporting purposes and 3
years for tax purposes. At the end of the fifth year, it will cost $100,000 to remove the
equipment, which can be sold for $300,000. Additional working capital of $400,000 will
be required immediately and needed for the life of the product. The product will sell for
$80, with direct labor and material costs of $65 per unit. Annual indirect costs will
increase by $500,000. Kell's effective tax rate is 40%.
In a capital budgeting analysis, what is the cash outflow at time 0 (initial investment) that
Kell should use to compute the net present value?
A. $1,300,000.
B. $1,900,000.
C. $1,700,000.
D. $1,500,000.
13. Question ID: ICMA 19.P2.029 (Topic: Capital Budgeting Process)
At the conclusion of a capital budgeting project, a piece of equipment is expected to be
sold for $500,000. At the time of sale, the book value of the equipment would be
$400,000. If the income tax rate is 35%, what is the after-tax cash flow from the sale of
the machine?
A. $325,000.
B. $400,000.
C. $535,000.
D. $465,000.
