11) An asset with a life of 5 years , using straight line depreciation will get
ID: 2810320 • Letter: 1
Question
11) An asset with a life of 5 years , using straight line depreciation will get 20% of the depreciable value as depreciation in the first year; Under accelerated on Double declining balance method, the firm ought to get 40% of the value of the asset as depreciation expense in the first year. However, you find that IRS only allows the firm 20% of the value ofthe asset as depreciation in the first year. The reason for this depreciation which is based is a) Inflation protection b) firm has a lower tax rate in year onde half year convention d) IRS increases their tax collection by doing this 30,000-ao,000: 10,oco 12) Computer after tax cash flow for the following firm: Sales: $30,000. Cost of goods sold and all expenses except depreciation $20,000. Depreciation :$20,000. Tax rate 30%. a)-10,000 B)-10,000 C700 D7000 13) How much in taxes will the firm save by using accelerated depreciation instead of straight line depreciation, given the following data. Tax rate is 40%. Sales : 1 million; All expenses except depreciation :$400,000. Using straight line depreciation : Depreciation expense :$100,000 if using accelerated depreciation: depreciation expense is $200,000. A) 30000 B) 50,000 C)40,000 D 60,000 that corporate bonds are available at an interest rate of 12%; 14) A sume Municipal bonds are yielding 8%Your tax bracket is 30%. Which bond will you pick to invest in, if your goal is to earn the highest rate of return. A) Corporate bond b) municipal bond c) James Bond Dude ! 15) You bought a bond last year with an interest rate of 8%, paying $1000 for it. Now , interest rates on newly issued bonds is at 9% in the market. This will mean that the price of bonds you had already bought last year will be worth: a) more than S1000 (b) less than $1000 C) equal to $1000. 16) Investing in Common stocks ought to lead to higher returns than investments in say US Treasury bills, because: b) fisk and return are positively related a) money has time value e) diversification helps reduce risks d) Value of an asset is present value of all future cashflowsExplanation / Answer
As per rules I will answer the first 4 subparts of the question
11:c half year convention
IRS allows the double declining depreciation method. However as per the half year convention only half the depreciation will be allowed. So 40%/2 =20% will be allowed.
12: b:10000
Sales= 30000
Less: COGS = 20000
Less: Depreciation = 20000
Net Income = -10000
Add back depreciation = 20000
Cash flow = 10,000
We disregard the impact of tax saving. Assume there is no tax due to net loss.
13: c: 40,000
Increase in depreciation due to accelerated method = 200000-100000 = 100000
Tax saving = 40%*100,0000 = $40,000
14: a: corporate bond
Return on corporate bond after tax = 12%*(1-Tax) = 12%*(1-0.3)
= 8.4%. This is higher than municipal bond which is tax free.
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