Final Exam Study guide
The following expenses are tax-deductable when a corporation files federal income tax return.
State income tax Operation and maintenance costs Depreciations of capital assets
Which of the following are some of the reasons that make economic evaluation of public projects more challenging than private projects?
They are often subject to societal benefits and impacts that are hard to quantify Their evaluation may involve balancing between those who "gain" from the project and those who "loose" They may be subject to conflicting impacts and viewpoints for different members of society They are sometimes motivated by political rather than economic goals
Assuming a positive inflation rate over the analysis period, for the same present worth value, the AW value based on real dollars is higher than the AW value based on actual dollars.
False
If Company A uses equipment it leases from Company B, then the company (i.e., Company A) is allowed to claim depreciation deductions on the equipment for tax purposes for the years that they used the equipment.
False
Only assets that are at or past their economic lifetimes should be considered for replacement
False
Replacement analysis between a defender and challenger can only be performed if they have equal service lives.
False
When doing economic analysis with "year-zero" dollar cash flows, the "market" interest rate should be used.
False
Toll lanes on a section of the I-40 freeway are being considered in order to reduce traffic congestion and travel times. Since this is a government project, the B-C ratio method must be applied in the evaluation. The following are cost and other estimates: Construction costs = $19,000,000 Operating and maintenance costs = $690,000 per year Projected service life = 20 years Savings in travel times and revenues generated from the tolls = $3,403,000 in the first year of operation and projected to increase by 2.3% per year due to the projected annual increase in traffic. In addition, environmental analysis estimates that the project will result in increased noise and air pollution that will cause an additional societal health cost of $615,000 the first year and is also projected to increase at 2.3% per year. The conventional benefit-cost ratio of the project with PW is According to the B-C ratio method, the toll lanes should
1. 0.96 not be constructed
Last year, the gross income of a small business was $290,000; the expenses were $70,000; and the depreciations of its capital assets were $25,000. If the state income tax rate was 9% and the federal income tax rate was 21%, determine the following two parameters: The state income tax (choose the nearest answer below) The federal income tax (choose the nearest answer below)
1. 17550 (2nd lowest) 2. 37265 (2nd lowest)
A company purchased new construction machinery in year 2015 by paying $200,000 cash. The company used MACRS-GDS depreciation for tax purposes and sold the asset in year 2017. Note that MACRS depreciations are based on calender years. Calculate the depreciation that the company claimed on the asset for year 2017. What was the book value of the asset at the time sale in 2017. ?
1. 19200 (2nd lowest 2. 76800 (2nd lowest)
Jane Smart has just invested $10,000 in a mutual fund that is expected to earn a market interest rate of 11% per year. If over the same time period inflation is expected to average 2% per year, calculate how much the investment will be worth at the end of 7 years in actual dollars and in real dollars. In actual dollars: In real dollars:
1. 20,762 (3rd highest) 2. 18074 (2nd highest)
Question 11, Instructor-created question Test Score: 76.92%, 10 of 13 points Points: 2 of 2 Close Mr and Mrs Smarts are deposit $10,000 on December 31st every year towards their retirement. If the bank is giving them an interest rate of 12% per year on their account and inflation is expected to average 2% per year in the next several years, how much money will their retirement account have after 20 years in actual dollars and in real dollars. In actual dollars: In real dollars:
1. 720524 (3rd lowest) 2. 484892 (lowest)
Determine the income tax to be paid for the following annual cash flows: gross revenue = $400,000; operating costs = $100,000; asset depreciation = $40,000; and income tax rate of 32%. For the data in the question above, what is the net after-tax cash flow?
1. 83200 (lowest) 2. 216800(3rd lowest)
Existing factory equipment bought 5 years ago for $30,000 is now worth $15,000 in market value. If the equipment is kept in service for one more year, it will cost $7,000 in operation and maintenance costs and will have a market value of $10,000 at the end of the year. Using a MARR of 10%, compute the marginal cost of keeping and operating the equipment this one more year.
13500 (2nd lowest option)
According to the US BLS, the CPI value grew from 135.2 in March 1991 to 238.1 in March 2016. Based on this, calculate the average annual general inflation rate over that period.
2.29% (3rd highest)
An equipment bought four years ago for $4,900 has a current market value of $2,520. If kept for one more year, it will cost $1,840 in operation and maintenance costs and will have a market value of $2,090 at the end of the year. In conducting a replacement analysis for the equipment, which of those cash flows can be considered its current opportunity cost?
2520 (3rd lowest)
An equipment bought four years ago for $4,540 has a current market value of $2,160. If kept for one more year, it will cost $1,480 in operation and maintenance costs and will have a market value of $1,730 at the end of the year. In conducting a replacement analysis for the equipment, which of those cash flows can be considered a sunk cost?
4540 (highest)
If the general inflation rate has averaged 3% per year over the last 4 years, $1,000 in an account now has the same purchasing power as approximately _______ of 4 years ago
888
A machine bought four years ago for $90,000 has a current book value of $9,000 for tax purposes. The owner is selling the machine now for $54,000. How much capital gain tax will he pay, if the tax rate is 21%?
9450 (3rd lowest)
Which of the following is the main goal for implementation of public projects?
Improve the social wellbeing of the community
The following tables show the marginal costs of a defender over its remaining four years of life and the EUACs of the challanger for various service lives. Based on this information, what is the most appropriate replacement decision?
Keep the defender this year (may replace at end of year 3) (photo 2)
Economic analysis on a proposed project for widening a 20-mile urban freeway segment to accommodate traffic growth is being conducted using the B-C ratio method. Which of the follwing is the most traditional way of calculating the B-C ratio?
Photo 3
The following tables show the marginal costs of a defender over its remaining four years of life and the EUACs of the challanger for various service lives. Based on this information, what is the most appropriate replacement decision?
Replace the defender now (photo 1)
Taxable income for capital gain of an asset that is being sold is calculated as
Sale price - Book value
Assuming a positive inflation rate over the analysis period, for the same present worth value, the AW value based on real dollars is lower than the AW value based on actual dollars.
True
Changes in the consumer price index (CPI) over time are often used to calculate inflation rates for the overall economy related to consumer goods and services in the US.
True
Due to inflation, the $100 bill you had two years ago was worth more than the $100 bill you have today.
True
For tax-purposes, a corporation may prefer the MACRS-ADS method of depreciation over MACRS-GDS if the corporation expects to lose money or generate very little income in the early years of operation
True
The effect of inflation is to decrease the purchasing power of the dollar over time.
True
The "after-tax MARR" is typically a lower value than the corresponding "before-tax MARR"
True
When doing economic analysis with "actual" dollar cash flows, the "market" interest rate should be used.
True
You are a part-time member of your local town board and are faced with a vote for or against a proposed public project which will directly benefit the company you work for. Will you
abstain from voting for fear of being accused of conflict of interest
A registered engineer is being interviewed on television on a matter relating to a public project for which he/she is the project manager. The interviewer then asks him/her a question about the chances for a cure for the COVID-19 virus (the corona virus). The engineer should
decline to comment
Frequent replacement of a capital asset ( i.e., shorter service life for the asset) typically results in
higher annualized capital cost and lower annualized maintenance costs
An investor wants to earn a minimum "real" annual interest rate of 10% on her investment. If the annual inflation rate over the period is estimated at 2%, her desired minimum "market" interest rate is
higher than 12%
If the federal income tax rate is 21%, the state income tax rate is 6%, and state income taxes are a deductible expence when filing federal taxes, then the combined effective income tax rate is
less than 27%
Keeping assets for very long service lives before replacing them typically results in
lower annualized capital cost and higher annualized maintenance costs
With respect to inflation analysis, which one of the following terms does not mean "real dollars"?
market dollars
The marginal costs of a defender for each of the final three years of service are $1,200, $1,050, and $1,300, respectively. If the MARR is 10% and the challenger's minimum EUAC is $1,100, the defender should be replaced
need more calculations to determine
In replacement analysis, the "economic lifetime" of a capital equipment is
the service life that results in the lowest EUAC of the asset
An engineer is faced with an issue of whether or not to fix a defective product that is resulting in loss of lives to some of the people who bought and used the product. The engineer does a cost-benefit analysis between the cost of recalling the product and fixing the defect and cost of not fixing it and only settling lawsuits resulting in the death of the accident victims. The result of the analysis is that it is more economical for the company not to fix the defect but just settle the potential resulting lawsuits. Should the engineer then recommend to the company
to fix the defect anyway at a loss to the company but for the sake of public safety
