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Capital Budgeting: A Closer Look
Multiple Choice

These Multiple Choice questions are designed to help determine how well you have mastered the text material. Try to answer all of these questions without using your text or the Review Points. Instant feedback and coaching for incorrect answers is provided when you complete the quiz and submit answers for grading.

For additional study questions and more practice exercises, see the Student Guide and Review Manual (ISBN 013-039144-1). To order a copy for all chapters of Cost Accounting, Third Canadian Edition, please contact your Pearson Education Canada sale representative.

Select the best answer to each question.

1 .       Assume a profitable company pays $10,000 for advertising and has a CCA deduction of $10,000. If the marginal tax rate is 40%, the after-tax effects on cash flow before considering the time value of money are a net outflow of: 



2 .       Ultraviolet Purifiers Ltd. purchased a patent for a new water treatment process for $130,000. The patent has a legal life of 40 years and a terminal disposal price of nil. Patents are Class 14 assets and the CCA is straight-line over the legal life. Assuming the marginal tax rate is 40%, what is the effect on the company's after-tax cash flow from the patent's CCA in the year of acquisition? 



3 .       (CMA adapted) Garfield Inc. is considering a 10-year capital investment project with forecasted annual cash revenues of $40,000 and forecasted annual cash operating costs of $29,000. The initial cost of the new equipment is $23,000, and Garfield expects to sell the equipment for $9,000 at the end of the tenth year. The equipment's CCA rate is 20%. The project requires a working capital investment of $7,000 at its inception and another $5,000 at the end of year 5. Assuming a 40% marginal tax rate, the cash flow from operations, net of income taxes, from the project for the second year is: 



4 .       Waste Management Ltd. (WM) has Class 10 UCC of $9,500 at the beginning of 2002. The company purchased a new automobile (Class 10) for $19,800 in 2002. WM received a trade-in allowance of $5,000 for an old automobile, paying the net amount of $14,800. The company's required rate of return is 10%. Assuming the marginal tax rate is 40%, what is the net present value of the after-tax cash outflow for the new automobile in 2002? (Use three decimal places in each component of the tax shield formula and round dollar amounts to the nearest dollar.) 



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