# 25 when undertaking a capital budgeting problem with taxes the total cash effect of 4308565

25) When undertaking a capital budgeting problem with taxes, the total cash effect of depreciation expense on a long-term asset is equal to ________.

A) $0

B) depreciation expense times the tax rate

C) depreciation expense times (1 minus the tax rate)

D) depreciation expense divided by the tax rate

26) Levine Company will purchase a van for $40,000. It will have a depreciable life of 5 years and a terminal salvage value of $10,000. Assume a tax rate of 30% and a required rate of return of 12%. The company uses the straight-line method of depreciation for tax purposes. The annual cash operating savings at the end of each year, exclusive of depreciation, are $10,000 for five years. The present value of an ordinary annuity factor of one for 5 periods at 12% is 3.6048. The present value of one for 5 periods at 12% is 0.5674. What is the net present value of the van?

A) $(441)

B) $(2,604)

C) $1,722

D) $5,420

27) Christina Company will purchase a van for $40,000. It will have a depreciable life of 5 years and a terminal salvage value of $10,000. Assume a tax rate of 20% and a required after-tax rate of return of 12%. The company uses straight-line depreciation for tax purposes. The annual cash operating savings at the end of each year, exclusive of depreciation, are $10,000 for five years. The present value of one for five periods at 12% is 0.5674. The present value of an ordinary annuity of one for five periods at 12% is 3.6048. What is the net present value of the van?

A) $(5,394)

B) $(1,162)

C) $11,909

D) $17,583

28) U.S. corporations are required to use the same method of calculating depreciation on both their income tax return and their annual financial statements.

29) The marginal income tax rate is the tax rate paid on additional amounts of pretax income.

30) When making capital budgeting decisions, the manager should utilize the marginal tax rate for the company instead of the average tax rate.

31) When using accelerated depreciation methods, most of the depreciation taken on an asset occurs at the end of its life.

32) A deduction for depreciation expense lowers a company's tax liability.

33) The present value of tax savings from depreciation is greater for straight-line depreciation than an accelerated depreciation method.

34) Lorenzo Company is considering the purchase of equipment with an eight year life that requires a $1,600,000 investment. At the end of eight years, the equipment will have no salvage value. For eight years, the equipment will provide net income at the end of each year as follows:

Sales$3,000,000

Less: Variable Expenses1,800,000

Contribution margin1,200,000

Less: Fixed Expenses:

Advertising700,000

Depreciation on equipment200,000

Net income$300,000

Other information follows:

Required rate of return18%

Tax rate30%

Depreciation method for tax purposesStraight-line

Present value of ordinary annuity of one

at 18% for 8 periods4.0776

Present value of one at 18% for 8 periods0.266

Required:

1. Compute the after tax annual cash flows generated by the equipment.

2. Compute the equipment's net present value.

3.