Deck 8: Taxes

Question 1

Which of the following assets has the fastest depreciation rate?

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

Answer 1

D

Question 2

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

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

Answer 2

B

Question 3

A tax is progressive if

A)the rate of taxation increases by a constant amount with an increase in income.
B)the rate of taxation increases proportionally with an increase in income.
C)the rate of taxation increases by a constant percentage with an increase in income.
D)the rate of taxation increases faster than the income.
E)the rate of taxation increases slower than the income.

Answer 3

D

Question 4

The before-tax MARR is

A)higher than the after-tax MARR by a factor of (1 - t), where t is the corporate tax rate.
B)lower than the after-tax MARR by a factor of (1 - t), where t is the corporate tax rate.
C)higher than the after-tax MARR by a factor t, where t is the corporate tax rate.
D)lower than the after-tax MARR by a factor t, where t is the corporate tax rate.
E)approximately equal to the after-tax MARR.

Question 5

The undepreciated capital cost (UCC)is equal to

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 6

Why should businesses take into account tax impacts?

A)Taxes directly affect a business's cash flow.
B)Taxes increase the gross profit of a business.
C)Taxes allow the government to pay for public goods and services.
D)Taxes reduce the costs of a successful project.
E)Taxes are savings for a Canadian business.

Question 7

GEMTECH Ltd. is an engineering construction company. It purchased an excavator for $200 000 in 1999 and a bulldozer for $180 000 in 2000. The UCC for the changes in asset holdings due to the purchases of an excavator are as follows: How much could the GEMTECH Ltd. claim as CCA in 2000?

A)$36 000
B)$54 000
C)$90 000
D)$130 000
E)$270 000

Question 8

Why do businesses want to depreciate their assets as soon as possible?

A)to balance their assets and liabilities
B)to decrease the amount of taxes they must pay
C)to release funds for further reinvestment
D)to increase productivity of their operations
E)to streamline their cash flows in the long-run

Question 9

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%?

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

Question 10

The capital tax factor (CTF)is a value that

A)summarizes the effect of the net benefits due to CCA on the present worth of an asset.
B)summarizes the effect of the costs imposed on a firm through taxes due to CCA on the present worth of an asset.
C)summarizes the effect of the benefits from future tax savings due to CCA on the present worth of an asset.
D)summarizes the total effect of the taxes due to CCA on the present worth of an asset.
E)summarizes the effect of the benefits claimed as CCA on the future worth of an asset.

Question 11

SHMON Inc. wants to invest in future projects. The before-tax MARR is 14%. The after-tax MARR was found to be 7.4%. What is the corporate tax rate of the company?

A)38%
B)42%
C)47%
D)53%
E)89%

Question 12

Sample CCA Rates and Classes are presented as follows: What does the number "20" in the CCA Rate column mean?

A)A firm can claim a 20% depreciation rate per year for an asset such as machinery, office furniture, and equipment during its service life.
B)A firm can claim a 20% depreciation rate per year for an asset such as machinery, office furniture, and equipment beginning in the second half of the year after purchase of that asset.
C)A firm can fully depreciate an asset such as machinery, office furniture, and equipment in 5 years from the time it is purchased using the depreciation rate of 20% per year.
D)A firm can claim a 20% depreciation rate on half of the capital cost of a new asset such as machinery, office furniture and equipment in the year of purchase of that asset, while the other half is included in the following year.
E)A firm can only depreciate an asset such as machinery, office furniture, and equipment with the rate of 20% in the first year of purchase of that asset.

Question 13

SINCO Ltd. purchased a piece of equipment in 2000. The UCC amounts for this equipment are given in the following table: How much could SINCO Ltd. claim as CCA in 2002 assuming there were no purchases or dispositions during that year (within that class)?

A)$26 250.00
B)$32 812.50
C)$40 250.50
D)$62 500.00
E)$131 250.00

Question 14

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%?

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

Question 15

The effect of taxation on annual savings is captured by

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 16

A firm has just purchased a vehicle for $100 000. The CCA rate for this vehicle is 40%. The firm's corporate tax rate is 50%. What would be the firm's tax savings due to the CCA by the end of the first year?

A)$5 000
B)$7 500
C)$10 000
D)$15 000
E)$20 000

Question 17

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%?

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

Question 18

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

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.

Question 19

An engineering construction company purchased an excavator for $200 000 in 1999 and a bulldozer for $180 000 in 2000. The UCC for the changes in asset holdings due to the purchases of an excavator are as follows: How much tax savings could the company accumulate due to the CCA by the end of 2000 if the corporate tax rate is 50%?

A)$20 000
B)$27 000
C)$32 000
D)$37 000
E)$54 000

Question 20

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

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 21

A manufacturing company bought a truck for $35 000. After 10 years the truck's salvage value will be $5 000. The truck is expected to produce a revenue of $10 000 per year, while maintenance costs are expected to be $1 000 per year. If the annual interest rate is 10%, the corporate tax rate is 35% and straight-line depreciation is applied, what amount of taxes associated with the truck's operation will the company pay in the first year?

Question 22

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

Question 23

An engineering project involves the purchase of a capital asset with first cost of $100 000, operating costs of $5 000 per year and a service life of 10 years. The expected revenue is $20 000 per year. If the CCA rate is 25%, interest rate is 10% and the corporate tax rate is 33%, what is the project's present worth?

Question 24

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?

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 25

Suppose that the after-tax interest rate is 10%, and the corporate tax rate is 50%. What is the before-tax interest rate?

A)40%
B)20%
C)15%
D)10%
E)5%

Question 26

The Capital Salvage Factor

A)captures the effect of taxation on an initial investment.
B)captures the effect on taxation of selling an asset for salvage.
C)captures the effect of taxation on operating costs.
D)captures the Half-Year Rule effect.
E)captures the effect of taxation on annual revenues.

Question 27

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?

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

Question 28

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?

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

Question 29

A company buys 10 new computers every year for $1 200 each. They depreciate at 30% per year. After two years they are sold for their UCC value. The half-year rule applies. If the company pays taxes at 40% and has an after-tax MARR of 20%, what is the net present cost of buying and subsequently selling each computer?

A)$289
B)$393
C)$412
D)$478
E)$521

Question 30

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?

Question 31

Explain when taxes are viewed as disbursements and when as savings

Question 32

The Capital Cost Allowance system uses a ________ depreciation rate to calculate the depreciation allowance for capital assets.

A)proportional
B)fixed
C)straight-line
D)declining-balance
E)arbitrary

Question 33

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

Question 34

Numerically the relationship between the CTF and the CSF is as follows:

A)CTF is always equal to CSF.
B)CTF is always smaller than CSF.
C)CTF is always greater than CSF.
D)CTF can be smaller or greater than CSF depending on circumstances.
E)CFS = 1 - CTF.

Question 35

The after-tax IRR is

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 36

In March of 1998 a company purchased a piece of equipment for $50 000. The corporate tax rate was and still is 30% and the after-tax MARR is 10%. What CTF should the company use if the present worth of the first cost of this equipment, taking into account all future tax savings due to the CCA, is $37 727?

A)0.7018
B)0.7213
C)0.7425
D)0.7545
E)cannot be determined

Question 37

An asset is purchased for $100 000. It depreciates at 20% per year. After 10 years it will be sold for salvage for $10 700. If the company is taxed at 50% and has an after-tax MARR of 10%, what is the present worth of this sale in the year of purchase?

A)$1 374
B)$2 177
C)$2 747
D)$4 125
E)$7 126

Question 38

In 2002 a firm completed the present-worth tax calculations for the value of the salvage cost of an asset that had reached the end of its useful life. For this purpose, the firm

A)multiplied the salvage value of the asset by d, where d is a depreciation rate.
B)multiplied the salvage value of the asset by (1 - d), where d is a depreciation rate.
C)multiplied the salvage value of the asset by (1 - t), where t is a corporate tax rate.
D)multiplied the salvage value of the asset by the CTF.
E)multiplied the salvage value of the asset by the CSF.

Question 39

A Canadian company buys a capital asset for $100 000. The asset depreciates at 20% per year, and the half-year rule applies. Use of the asset brings in $5 000 a year in profit. If these are the company's only cash flows, what is the first year in which they have to pay taxes?

A)1
B)2
C)3
D)4
E)5

Question 40

An engineering company just bought a bending machine for $50 000. Its service life is 10 years, and afterwards its salvage value will be $2 000. Services provided by the machine are expected to bring
$10 000 in annual revenues, and operating costs are estimated at $2 000 per year. Assume that the CCA rate is equal to the depreciation rate, the after-tax interest rate is 5% and the corporate tax rate is 30%. Calculate the present worth of this investment.

Question 41

Explain the problem of "writing-off" and how the introduction of the Half-Year Rule addressed this problem.

Question 42

What is the difference between the CCA rate and the depreciation rate, and how do the two affect financial analysis?

Question 43

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

Question 44

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.

Question 45

Last year an engineering company earned $200 000 in annual revenues, and incurred $100 000 in total operating costs. It also bought a new lathe for $50 000. With a CCA rate of 30% and a corporate tax rate of 50%, how much income tax did the company pay?

Question 46

Explain the main objective of the Canadian Capital Cost Allowance system and its basic assumptions.

Question 47

New Brunswick Metalworks is evaluating a $100 000 polishing machine (CCA class 8). Services provided by the machine are expected to bring $15 000 per year in value over the next five years. Operating costs are expected to be $1 000 per year. Calculate the amount of taxes paid in each of the next five years of service life under the corporate tax rate of 40%.

Question 48

An oil company uses a technology which it purchased for $15 million. Operating costs are $2 million per year, and output is 1 000 barrels per day. Calculate the after-tax IRR given the following information: The corporate tax rate is 25%, the price of oil is $20 per barrel, the service life of the technology is 5 years and salvage value is $2 million. If the after-tax MARR is 15%, is this a good investment?

Question 49

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