[jeff]

Welcome to the Q1 2016 CPA Exam Study Group for BEC.

Some BLITZ videos to help your exams: https://www.another71.com/ninja-blitz

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[FAR_WARS]

WHY IS THE INITIAL INVESTMENT OF 10 BOTH AN INFLOW AND AN OUTFLOW??????

Assume that Straper Industries is considering investing in a project:

Initial Investment__________________500,000
Addl. investment in working capital_____10,000
Cash flows before Income tax________140,000
Yearly tax dep_____________________90,000
Terminal value of investment__________50,000
Cost of Capital_____________________10%
PV OF $1= _______________________.621
PV of annuity= _____________________3.791
Marginal tax rate ___________________30%
Investment Life _____________________5yrs.

What is NPV of the investment?

a. $175,000
b. $58,000
c. $1,135
d. $(12,340)

(140 – 90 depreciation) × 30% = 15 annual tax expense

(140 – 15 tax) * 3.791= 473.875
10 adtl investment *.621 = 6.21
50 terminal value * .621= 31.05
_____________________________PV inflows: 511.135

500 Initial Investment
10 adtl initial investment
____________________________PV outflows: 510
____________________________________________PV project: 1.135

FAR- 80
BEC- 75
AUD- 78
REG- ?

[monikernc]

Given the following data, what is the marginal propensity to consume?

Level of
Disposable — Level of
Income ——-Consumption
———- ———–
1. $40,000 —– $38,000
2. 48,000 ——–44,000

Select an answer:
A.
1.33

B.
1.16

C.
0.95

D.
0.75

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[FAR_WARS]

@moniker

d

MPC
6/8 = .75

MPS
2/8=.25

FAR- 80
BEC- 75
AUD- 78
REG- ?

[Anonymous]

Farwars they want us to assume that sometimes some projects require an increase in WC and that at the end that WC is sold. What I do not like about those questions is that sometimes different treatment is given (with the same scenarios) and sometimes they do not take into account all factors. For example in that mcq I would have thought that a tax would have been charged to the 50,000 and 10,000 sale of investmentat at the end. I have seen it in some mcqs and honestly is common sense to think that if a tax is being charged to operating income that a tax is charged to that sale too. Rant over…

[monikernc]

Yes farwars but i am out of cars for you.

I don't get the whole terminal value thing. Plz explain.

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[monikernc]

100 mcqs. 89% too many repeats of questions i get right.

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[FAR_WARS]

terminal value = salvage value?

as for the varying tax effects of inflows and outflows, i have no idea.

FAR- 80
BEC- 75
AUD- 78
REG- ?

[FAR_WARS]

moniker, here- stop doing repeats

Which of the following capital budgeting techniques would allow management to justify investing in a project that could not be justified currently by using techniques that focus on expected cash flows?

a. Real options.
b. Net present value.
c. Accounting rate of return.
d. Internal rate of return.

FAR- 80
BEC- 75
AUD- 78
REG- ?

[payaza2000]

@monikernc

I'm assuming you're using NINJA. I find it helpful to do sets of trouble questions. If they repeat, intentionally answer wrong unless you know how to work out the question.

-> Doing this evening, it is quite revealing for some of my weaknesses.

FAR 5/6/2015- 84
REG 8/3/2015 - 87
AUD 10/25/2015- 69 1/20/2016 -75
BEC 2/26/2016- 80

Thank you God

[Anonymous]

Yes terminal value = residual (salvage) value. Or sometimes they can give the tax basis at the end. If it has a 8,000 tax basis and they sell it at 10,000 there is a 2,000 gain and I assume there is a tax on the 2,000. And if they sell it at 6,000 there is a 2,000 tax shield. NPV is my nemesis, I hope I do not see it much on the exam.

[payaza2000]

@cortes123

I am assuming you are already knowing this, but make sure you multiply the correct % times the salvage value.

Using your example above if you:

Sell 10,000
BV:8,000
= 2,000 (1-tax rate)

However:
Sell 6,000
BV:8,000
= 2,000 (Tax Rate) = Your tax shield

or at least I think. So much for BEC being the ‘Easy One' 😛

FAR 5/6/2015- 84
REG 8/3/2015 - 87
AUD 10/25/2015- 69 1/20/2016 -75
BEC 2/26/2016- 80

Thank you God

[Anonymous]

payaza you are right. And sometimes there can be cost to remove the investment. In that case that would be only a cash outflow. What I do not remember if its discounted or not.

[monikernc]

So terminal value is given as salvage value when they are not providing a price for which they sell at end of project. Hence, no loss or gain is considered. Thanks.
Payaza, you are correct. Tax savings when there is a loss. Tax pmt when a gain.

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[Anonymous]

What monikernc wrote regarding the salvage value not having a price explains why there was no tax considered on the sale. Still we have to watch out when they give a price. Not feeling comfortable at all.

[payaza2000]

@monikernc

Tax pmnt. So for our purposes we would just discount the net after tax.

FAR 5/6/2015- 84
REG 8/3/2015 - 87
AUD 10/25/2015- 69 1/20/2016 -75
BEC 2/26/2016- 80

Thank you God

[Author]

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