Question 1

In the CCA system "the half-year rule" implies

Accepted Answer

A) that a firm can depreciate half the remaining capital cost of an asset in any given year after the asset is purchased. 
B) that a firm can depreciate half the capital cost of an asset during the first half a year the asset is purchased. 
C) that a firm can depreciate the capital cost of an asset during the first half a year the asset is purchased. 
D) that a firm can depreciate half the capital cost of a new asset in the year the asset is purchased. 
E) that a firm cannot depreciate the capital cost of an asset for at least half a year after the asset is purchased. 
A) that a firm can depreciate half the remaining capital cost of an asset in any given year after the asset is purchased. 
B) that a firm can depreciate half the capital cost of an asset during the first half a year the asset is purchased. 
C) that a firm can depreciate the capital cost of an asset during the first half a year the asset is purchased. 
D) that a firm can depreciate half the capital cost of a new asset in the year the asset is purchased. 
E) that a firm cannot depreciate the capital cost of an asset for at least half a year after the asset is purchased. D

Question 2

Explain when taxes are viewed as disbursements and when as savings

Accepted Answer

When a firm makes an investment, the income from the project will affect the company's cash flows. If the investment yields a profit, the profits will be taxed. Since the taxes are a direct consequence of the investment, they reduce the net profits associated with that investment. In this sense, taxes associated with a project are a disbursement. If the investment yields a loss, the company may be able to offset the loss from this project against the profits from another and end up paying less tax overall. As a result, when evaluating a loss-generating project, the net savings in tax can be viewed as a negative disbursement. Income taxes thus reduce the benefits of a successful project, while at the same time reducing the costs of an unsuccessful project

Question 3

Calculate the CSF and CTF given the following information: the before-tax interest rate is 10%, the corporate tax rate is 45%, the depreciation rate is 20% and the CCA rate is 25%. Which one is higher and why?

Accepted Answer

First, it is necessary to calculate the after-tax interest rate as follows:
i = 0.1 * (1-0.45)= 0.055
The two capital cost tax factors are defined as follows:
CSF = 1 -   = 1 -   = 0.631
CTF = 1 -   = 1 -   )= 0.641
In the above formulas, d is the CCA rate. The CTF is higher which means less tax savings under the current Canadian Capital Cost Allowance system. This is due to the Half-Year Rule introduced on November 13, 1981 to prevent fast depreciation of an asset in its first year.

Question 4

DON Corporation is making a decision about a project that has an after-tax internal rate of return of 18%. If the company pays 30% corporate income tax rate what is the before-tax internal rate of return?

Accepted Answer

A) 12.6% 
B) 18.0% 
C) 22.4% 
D) 25.7% 
E) 60.0% 
A) 12.6% 
B) 18.0% 
C) 22.4% 
D) 25.7% 
E) 60.0%

Question 5

A company purchased a piece of equipment in 2000. The UCC amounts for this equipment are as follows:   How much tax savings could the company accumulate due to the CCA by the end of 2001 if the corporate tax rate is 50%?

Accepted Answer

A) $12 465 
B) $24 580 
C) $30 925 
D) $34 375 
E) $68 750 
A) $12 465 
B) $24 580 
C) $30 925 
D) $34 375 
E) $68 750

Question 6

Explain why the value of IRRafter-tax calculated as IRRafter-tax ≈ IRRbefore-tax * (1 - t)is only an approximation to the actual IRRafter-tax.

Accepted Answer

The calculated value is approximately co

Question 7

Suppose that a Canadian company bought a car for $20 000. The CCA rate for the car is 20% and the corporate tax rate is 40%. How much money does the company save in the first year as a result of the CCA allowance?

Accepted Answer

A) $2 400 
B) $1 600 
C) $1 200 
D) $800 
E) It does not save at all since it still has to pay taxes. 
A) $2 400 
B) $1 600 
C) $1 200 
D) $800 
E) It does not save at all since it still has to pay taxes.

Question 8

What is the undepreciated capital cost and how it is related to an asset's book value?

Accepted Answer

The book value is the current value of a

Question 9

The effect of taxation on annual savings is captured by

Accepted Answer

A) the capital tax factor. 
B) the capital salvage factor. 
C) the depreciation rate. 
D) multiplying savings by the corporate tax rate. 
E) multiplying savings by one minus corporate tax rate. 
A) the capital tax factor. 
B) the capital salvage factor. 
C) the depreciation rate. 
D) multiplying savings by the corporate tax rate. 
E) multiplying savings by one minus corporate tax rate.

Question 10

What was the goal of the Canadian government in designing the Capital Cost Allowance system?

Accepted Answer

A) to calculate the total amount of taxes that the government collects from businesses' profits 
B) to define the after-tax minimum acceptable rate of return that businesses can use to account for the effects of taxation while making their investment decisions 
C) to define a corporate tax rate that businesses must use while calculating the amount of their taxes 
D) to define a specific amount of depreciation that businesses may claim in any year for any one depreciable asset 
E) to facilitate businesses in calculating their cash flows associated with the purchase of a long-term depreciable asset 
A) to calculate the total amount of taxes that the government collects from businesses' profits 
B) to define the after-tax minimum acceptable rate of return that businesses can use to account for the effects of taxation while making their investment decisions 
C) to define a corporate tax rate that businesses must use while calculating the amount of their taxes 
D) to define a specific amount of depreciation that businesses may claim in any year for any one depreciable asset 
E) to facilitate businesses in calculating their cash flows associated with the purchase of a long-term depreciable asset

Question 11

The undepreciated capital cost (UCC)is equal to

Accepted Answer

A) the book value of an asset for the purpose of taxation under the CCA system. 
B) the market value of an asset. 
C) the salvage value of an asset. 
D) the scrap value of an asset. 
E) the non-taxable value of an asset. 
A) the book value of an asset for the purpose of taxation under the CCA system. 
B) the market value of an asset. 
C) the salvage value of an asset. 
D) the scrap value of an asset. 
E) the non-taxable value of an asset.

Question 12

Which of the following assets has the fastest depreciation rate?

Accepted Answer

A) land 
B) truck 
C) warehouse 
D) rental car 
E) office desk 
A) land 
B) truck 
C) warehouse 
D) rental car 
E) office desk

Question 13

Sirius Ltd. purchased a piece of equipment at the very beginning of the 1999 fiscal year. The UCC amounts for this equipment are as follows:   What was the present worth at the beginning of fiscal 1999 of the company's savings due to CCA over the two-year period if the corporate tax rate was 25% and the interest rate was 10%?

Accepted Answer

A) $2 397 
B) $2 488 
C) $2 800 
D) $3 214 
E) $4 263 
A) $2 397 
B) $2 488 
C) $2 800 
D) $3 214 
E) $4 263

Question 14

A taxi company buys two new taxis at the beginning of every year. It keeps its taxis until they are worn out and have negligible value. Each taxi costs $20 000. The company is taxed at 50%, and the taxis depreciate at 40% per year. The company's after-tax MARR is 20%. What is the equivalent uniform annual cost to them of buying the taxis?

Accepted Answer

A) $14 668 
B) $25 333 
C) $30 400 
D) $40 000 
E) $48 000 
A) $14 668 
B) $25 333 
C) $30 400 
D) $40 000 
E) $48 000

Question 15

A manufacturing company just bought a new piece of equipment for $1 million. It is a class 8 asset. The following information is given:
- after-tax annual interest rate = 8%
- corporate tax rate = 36%
- service life = 10 years
- historic depreciation rate = 25%
Calculate the present worth of the equipment's salvage value with tax effects.

Accepted Answer

First of all, it is necessary to calcula

Question 16

The after-tax IRR is

Accepted Answer

A) always greater than the before-tax IRR. 
B) equal to the before-tax IRR. 
C) always smaller than the before-tax IRR. 
D) equal to the before-tax IRR minus the inflation rate. 
E) equal to the before-tax IRR plus the inflation rate. 
A) always greater than the before-tax IRR. 
B) equal to the before-tax IRR. 
C) always smaller than the before-tax IRR. 
D) equal to the before-tax IRR minus the inflation rate. 
E) equal to the before-tax IRR plus the inflation rate.

Question 17

The salvage value of a ten-year-old truck is $10 000. If this truck is on the Balance Sheet of a transportation company as a Class 8 asset with a CCA rate of 20%, what was the present worth of this salvage value at the time of the truck's purchase if the corporate tax rate is 35% and annual after-tax interest rate is 5%?

Accepted Answer

A) $10 000 
B) $8 200 
C) $7 200 
D) $6 240 
E) $4 420 
A) $10 000 
B) $8 200 
C) $7 200 
D) $6 240 
E) $4 420

Question 18

Explain why it is important to incorporate tax impacts into a business's cash flows.

Accepted Answer

Taxes can have a significant impact on t

Question 19

What was the major reason for the government 's introduction of the Half-Year Rule?

Accepted Answer

A) to address the problem of delivery of public goods and services 
B) to address the government's losses due to companies purchasing assets at the end of their fiscal year 
C) to reduce business activity 
D) to internalize externalities 
E) to follow international practice 
A) to address the problem of delivery of public goods and services 
B) to address the government's losses due to companies purchasing assets at the end of their fiscal year 
C) to reduce business activity 
D) to internalize externalities 
E) to follow international practice

Question 20

A project involves an immediate expenditure of $10 000, and further expenditures of $10 000 every year for the next four years. It will yield an income of $8 000 at the end of the first year, and this will increase by $8 000 a year. This is the only project the company has; it is taxed at 50%, and its after-tax MARR is 10%. Assume that losses cannot be carried forward to offset future income. What is the present worth of the project to the company?

Accepted Answer

A) $7 452 
B) $9 342 
C) $12 296 
D) $15 251 
E) $27 552 
A) $7 452 
B) $9 342 
C) $12 296 
D) $15 251 
E) $27 552

In the CCA system "the half-year rule" implies

Explain when taxes are viewed as disbursements and when as savings

Calculate the CSF and CTF given the following information: the before-tax interest rate is 10%, the corporate tax rate is 45%, the depreciation rate is 20% and the CCA rate is 25%. Which one is higher and why?

DON Corporation is making a decision about a project that has an after-tax internal rate of return of 18%. If the company pays 30% corporate income tax rate what is the before-tax internal rate of return?

A company purchased a piece of equipment in 2000. The UCC amounts for this equipment are as follows: How much tax savings could the company accumulate due to the CCA by the end of 2001 if the corporate tax rate is 50%?

Explain why the value of IRRafter-tax calculated as IRRafter-tax ≈ IRRbefore-tax * (1 - t)is only an approximation to the actual IRRafter-tax.

Suppose that a Canadian company bought a car for $20 000. The CCA rate for the car is 20% and the corporate tax rate is 40%. How much money does the company save in the first year as a result of the CCA allowance?

What is the undepreciated capital cost and how it is related to an asset's book value?

The effect of taxation on annual savings is captured by

What was the goal of the Canadian government in designing the Capital Cost Allowance system?

The undepreciated capital cost (UCC)is equal to

Which of the following assets has the fastest depreciation rate?

The after-tax IRR is

Explain why it is important to incorporate tax impacts into a business's cash flows.

What was the major reason for the government 's introduction of the Half-Year Rule?

Engineering Decision Making

Time Value of Money

Cash Flow Analysis

Comparison Methods: Part I

Comparison Methods: Part Ii

Financial Accounting and Business Plans

Replacement Decisions

Inflation

Public Sector Decision Making

Project Management

Dealing With Uncertainty and Risk

Filters

Exam 8: Taxes

In the CCA system "the half-year rule" implies

Explain when taxes are viewed as disbursements and when as savings

Calculate the CSF and CTF given the following information: the before-tax interest rate is 10%, the corporate tax rate is 45%, the depreciation rate is 20% and the CCA rate is 25%. Which one is higher and why?

DON Corporation is making a decision about a project that has an after-tax internal rate of return of 18%. If the company pays 30% corporate income tax rate what is the before-tax internal rate of return?

A company purchased a piece of equipment in 2000. The UCC amounts for this equipment are as follows: How much tax savings could the company accumulate due to the CCA by the end of 2001 if the corporate tax rate is 50%?

Explain why the value of IRRafter-tax calculated as IRRafter-tax ≈ IRRbefore-tax * (1 - t)is only an approximation to the actual IRRafter-tax.

Suppose that a Canadian company bought a car for $20 000. The CCA rate for the car is 20% and the corporate tax rate is 40%. How much money does the company save in the first year as a result of the CCA allowance?

What is the undepreciated capital cost and how it is related to an asset's book value?

The effect of taxation on annual savings is captured by

What was the goal of the Canadian government in designing the Capital Cost Allowance system?

The undepreciated capital cost (UCC)is equal to

Which of the following assets has the fastest depreciation rate?

The after-tax IRR is

Explain why it is important to incorporate tax impacts into a business's cash flows.

What was the major reason for the government 's introduction of the Half-Year Rule?

Engineering Decision Making

Time Value of Money

Cash Flow Analysis

Comparison Methods: Part I

Comparison Methods: Part Ii

Financial Accounting and Business Plans

Replacement Decisions

Inflation

Public Sector Decision Making

Project Management

Dealing With Uncertainty and Risk

Filters