[jeff]

Welcome to the Q2 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

[Anonymous]

Which of the following events would decrease the internal rate of return of a proposed asset purchase?

A.
Decrease tax credits on the asset

B.
Decrease related working capital requirements

C.
Shorten the payback period

D.
Use accelerated instead of straight-line depreciation

The correct answer is A.

Two general rules can be developed related to the internal rate of return (IRR) of a proposed asset purchase:
1.Increases in cash inflows (decreases in cash outflows) will result in a higher internal rate of return.
2.The earlier the cash inflows (the later the cash outflows) the higher the internal rate of return, all else being equal.

Taxes in general will lower the IRR of a proposed asset purchase, as will decreases in the tax credits available when an asset is purchased.

I tried to verify the rules above, but my numbers were unable to prove it:

IRR = Initial Investment / Inflows

Data:
80/120 = 67%

Increase in Cash Inflows:
80/140 = 57%

Decrease in Cash Outflows:
60/120 = 50%

What am I missing?

[aatoural]

That ‘s a great simplifying conceptual question! and the benefit is always depr. time the tax rate.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[Anonymous]

@Aatoural, here’s another one. There was a mention of depreciation method and all that, but none as to the tax savings or tax rates.
Is this what you were referring to earlier in your post above that we can always ignore depreciation in the calculation if there would be no mention of taxable portion of depreciation?

Tam Company is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s esti­mated useful life is 10 years, with no residual value, and would be depreciated by the straight-line method. Tam’s predetermined minimum desired rate of return is 12%. Present value of an annuity of 1 at 12% for 10 periods is 5.65. Present value of 1 due in 10 periods at 12% is 0.322.

What is the net present value?

Incorrect A.
$5,760

B.
$6,440

C.
$12,200

D.
$13,000

You answered A. The correct answer is D.

Net present value is the difference between the present value of future cash inflows from an investment and the investment’s initial cost. The present value of $20,000 per year for 10 years at 12% is 5.65 × $20,000, or $113,000. The investment cost is $100,000, so the difference, the net present value, is $13,000.

[Spartans92]

Platinum Co. has a receivable due in 30 days for 30,000 euros. The treasurer is concerned that the value of the euro relative to the dollar will drop before the payment is received. What should Platinum do to reduce this risk?
A.
Buy 30,000 euros now

Incorrect B.
Enter into an interest rate swap contract for 30 days

C.
Enter into a forward contract to sell 30,000 euros in 30 days
D.
Platinum cannot effectively reduce this risk.

Im confused with all these hedges and swaps.. Can someone make it more simple and explain why C is better than B?

BEC- PASS

[Anonymous]

Let’s say Platinum Co. is operating as GMC-USA and has a receivable from a customer company based in Europe (GMC-UK). GMC-UK’s account is due in 30 days and they are to pay GMC-USA in EUR. GMC-USA entered a forward contract with Chase-USA to sell these 30,000-EUR on the date specified so GMC-USA gets their payment from Chase in USD.

[mckan514w]

Spartan- hope this makes sense– a forward contract you are agreeing to a set price in the future so you know you are agreeing to sell X amount in X days at X price… you are betting that the market goes up or down… usually WITH AN ASSET THAT YOU OWN- it is predetermined— (these two things are key) so you are hedging your risk

with an interest rate saw you are essentially “playing the float” – you don't know where interest rates are going to be in X amount of days could be higher / could be lower so it is a variable contract… you don't own the asset because it is a cash item-you are essentially paying cash now for an interest rate in the future… thus this would exponentially increase your risk instead of hedge against it….

I hope this didn't sound too convoluted….. 🙂 (BTW thanks for the earlier congrats… the pass def. gave me an extra boost to concentrating on BEC)

and they ask me why I drink...

FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2

[Spartans92]

Thanks guys! McKan that makes so much more sense!

BEC- PASS

[aatoural]

AmorD – that is exactly what I was referring to. i think that is as easy as it gets for NPV questions. BTW do you fully understand the working capital and how it work in these NPV problem? That is the part that throws me off still.

Sparatan – those questions are my worst nightmare.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[Anonymous]

@aatoural, thanks.

I am not really sure what I don't know, haha. Are you talking about the inflows and outflows of operations (cash collections and disbursements = WC?). I would just think of the IN&OUT (of CFs) processes to distinguish CIFs from COFs (cash inflows vs. cash outflows).

I have another question guys. My notes say: RISK SEEKING => managers who seek reduced return demand for higher risk.
Did I write it wrong? Should it be “MANAGERS WHO SEEK REDUCED R-I-S-K DEMAND FOR HIGHER R-E-T-U-R-N?

[Kmay89]

@aatoural For additional working capital needed in NPV problems. I think of it best as two separate transactions, a cash inflow and a cash outflow that is similar to putting down a security deposit on an apartment to rent. Because it is money that needs to be set aside right now that you can't touch, it is a current cash outflow so the stated amount should be added to the initial investment amount. The second step of the transaction is that at the end of the life of the investment, you can use that money again so it is a cash inflow that you receive in the future so the working capital amount should be discounted back to the present value and added to the other cash inflow present value amounts.

BEC- 93
FAR- 9/6/2016
AUD- 10/7/2016
REG- 11/21/2016

Wiley CPAexcel Self Study & Ninja supplements

[aatoural]

Thanks Kmay89. That rent example was perfect to make me understand it.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[aatoural]

Guys I got this correct by luck, but I don't actually understand what it means. If somebody can explain please!!

Which one of the following statements is most correct if a seller extends credit to a purchaser for a period of time longer than the purchaser's operating cycle? The seller:
a – Has no need for a stated discount rate or credit period.
b – Is, in effect, financing more than just the purchaser's inventory needs.
c – Is, in effect, financing the purchaser's long-term assets.
d – Will have a lower level of accounts receivable than those companies whose credit period is shorter than the purchaser's operating cycle.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[Kmay89]

Is the answer C?

BEC- 93
FAR- 9/6/2016
AUD- 10/7/2016
REG- 11/21/2016

Wiley CPAexcel Self Study & Ninja supplements

[aatoural]

Sorry, I forgot to put the answer. It is B.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[mckan514w]

anyone have any good resources / links / videos etc… to help me out with Internal Controls and IT? Seriously Roger may as well be talking greek to me and the book may as well be written in Latin… seriously struggling with this!

and they ask me why I drink...

FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2

[Author]

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