QUESTION 1
1. Thieme Enterprises must purchase a new milling machine. The purchase price is $75,000, including installation. The machine has a tax life of 6 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $15,000. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?
Year
Depreciation Rate
1
0.25
2
0.25
3
0.20
4
0.15
5
0.10
6
0.05

$5,250

$9,750

$12,750

$13,500

$2,250
10 points
QUESTION 2
1. Which of the following statements is CORRECT?

If they use accelerated depreciation, firms can write off assets faster than they could under straight-line depreciation, and as a result projects' forecasted NPVs are normally higher than they would be if straight-line depreciation were required for tax purposes.

Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 3 years or longer.

If they use accelerated depreciation, firms can write off assets faster than they could under straight-line depreciation, and as a result projects' forecasted NPVs are normally lower than they would be if straight-line depreciation were required for tax purposes.

If firms use accelerated depreciation, they will write off assets slower than they would under straight-line depreciation, and as a result projects' forecasted NPVs are normally lower than they would be if straight-line depreciation were required for tax purposes.

Using accelerated depreciation rather than straight line normally has no effect on a project's total projected cash flows nor would it affect the timing of those cash flows or the resulting NPV of the project.
10 points
QUESTION 3
1. Which of the following statements is CORRECT?

If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its customers. Thus, cannibalization is dealt with by society through the antitrust laws.

If cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. Otherwise, the calculated NPV will be biased downward.

If cannibalization is determined to exist, then this means that the calculated NPV if cannibalization is considered will be higher than the NPV if this effect is not recognized.

Cannibalization, as described in the text, is a type of externality that is not against the law, and any harm it causes is done to the firm itself.

If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its competitors. Thus, cannibalization is dealt with by society through the antitrust laws.
10 points
QUESTION 4
1. Taylor Inc., the company you work for, is considering a new project whose data are shown below. What is the project's Year 1 cash flow?
Sales revenues, each year
$62,500
Depreciation
$8,000
Other operating costs
$25,000
Interest expense
$8,000
Tax rate
35.0%

$25,816

$27,175

$28,534

$29,960

$31,458
10 points
QUESTION 5
1. Gardenzio Media is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. This is just one of many projects for the firm, so any losses can be used