"capital gain" and is taxed at a rate equal to the firm's ordinary tax rate, or a maximum of "recapture of depreciation" and is taxed at the corporate capital gains rate. "capital gain" and is taxed at the corporate capital gains tax. In general, if a depreciable asset used in business is sold for more than its depreciated (tax) book value, any amount realized in excess of book value but less than the asset's depreciable basis is considered a (See information in Question #7 above.) The "cost" of this asset that, by law, may be written off over time "for tax purposes" is closest toĩ. The firm's marginal tax rate is 34 percent. The estimated final salvage value of the machine is $120,000. Has a useful life of 4 years and falls in the 3-year property class for MACRSĭepreciation purposes. Smith has calculated that automation would result in savings of $45,000 a yearĭue to reduced scrap and $65,000 a year due to reduced labor costs. Shipping and installation would cost $5,000. Adam Smith is considering automating his pin factory with Taxing authorities allow the fully installed cost of an asset to be written off for tax purposes. Is only undertaken by large corporations.Īpplies only to investment in fixed assets.Ħ. In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following EXCEPT:Ĭhanges in working capital resulting from the project, net of spontaneous changes in This is required by the Securities and Exchange Commission.Ĥ. This is required by the Internal Revenue Service. It is cash, not accounting income, that is central to the firm's capital budgeting decision. It is simpler to calculate cash flows than income flows. The estimated benefits from a project are expressed as cash flows instead of income flows because: In proper capital budgeting analysis we evaluate incrementalģ. All of the following influence capital budgeting cash flows EXCEPT:Ģ. Note: Your browser must support JavaScript in order to use this quiz.ġ. Just click on the button next to each answer and you'll get immediate feedback. Chapter 12: Capital Budgeting and Estimating Cash Flows