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

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

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