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Depreciation and taxes

5. For a profitable business paying income taxes at the rate of 35%, an extra dollar of deductions in the current year reduces taxes otherwise payable by
A. \$1.35.
B. \$1.00.
C. \$0.65.
D. \$0.35.
E. Cannot be determined from the information given.

6. An asset costing \$1,000 with a useful life of 7 years and no salvage value is depreciated using 150% declining balance depreciation. The depreciation charge in the second year is:
A. \$219.
B. \$236.
C. \$168.
D. \$152.
E. None of these.

8. Which of the following statements is true?
A. The net present value of after-tax cash flows to a firm does not depend on tax depreciation.
B. The net present value of after-tax cash flows to a firm is higher when tax depreciation is more rapid.
C. The net present value of after-tax cash flows to a firm is lower when tax depreciation is more rapid.
D. The net present value of after-tax cash flows is the same as the pre-tax cash flows. Only the discount rate is affected by taxes.

9. All else equal, a switch from 150% declining balance depreciation to double declining balance depreciation for tax purposes has the effect of:
A. increasing the after-tax net present value of new capital projects.
B. decreasing the after-tax net present value of new capital projects.
C. lowering before-tax GAAP income in every year.
D. raising before-tax GAAP income in every year.
E. None of these.

Solution Preview

5. The tax would reduce by the tax rate of 35%. The answer is d \$0.35

6. Depreciation for year 1 = 1,000 X 1.50/7 = 214.29
Depreciation for year 2 = (1,000-214.29) X 1.50/7 = \$168

8. B. The ...

Solution Summary

The solution explains some multiple choice questions relating to depreciation and taxes

\$2.19