1. depreciation is the newest and most widely used depreciation method. It was introduced by the Tax Reform Act of 1986.

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1 Carefully read each problem before answering. Please write clearly, and show and label all factors/numbers used in any problem requiring mathematical calculations. Show all work. Multiple Choice: 4 points each 1. depreciation is the newest and most widely used depreciation method. It was introduced by the Tax Reform Act of a) Straight Line b) Sum-of-Years Digits c) Double Declining Balance d) DDB SL e) MACRS 2. The exhaustion of natural resources as a result of their removal is known as. a) Depreciation b) Depletion c) Expense d) Withdrawal e) None of the above 3. Consider a project that initially costs $100,000 and returns $30,000 in net annual benefits over a 7-year period. Given an MARR of 10%, the simple payback period is closest to a) 3.33 years b) 0.30 years c) 1.46 years d) 2.85 years e) 4.29 years 4. An asset is depreciated using straight-line depreciation. The initial cost of the asset was $100,000. The depreciation rate is $10,000 per year for 8 years. At the end of the 4 th year the asset is sold for $70,000. From a tax perspective, what is happening at the time of disposal, and what is the dollar amount? a) capital gain; $30,000 b) ordinary gain; $70,000 c) ordinary loss; $10,000 d) ordinary gain; $10,000 e) capital gain; $70,000 f) capital gain; $10,000 g) none of the above

2 Use the following information for problems 5-8. An asset costs $200,000 and has an estimated salvage value of $25,000 after its 5-year depreciable life. 5. Using Double Declining Balance depreciation, the depreciation in year 3 is closest to a) $80,000 b) $48,000 c) $5,900 d) $21,600 e) $28, Using Straight Line depreciation, the depreciation in year 2 is closest to a) $20,000 b) $40,000 c) $5,900 d) $35,000 e) $70, Using Sum-of-Years Digits depreciation, the depreciation in year 2 is closest to a) $58,333 b) $46,667 c) $141,667 d) $85,000 e) $40, The MACRS percentages for the 5-year property class are as follows: 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%. The book value after the 5.76% depreciation is taken is closest to a) $96,000 b) $200,000 c) $0.00 d) $160,000 e) Cannot calculate 9. Consider a project that initially costs $30,000 and has a 5 year lifetime. The project returns benefits of $10,000 at the end of the first year, increasing by $3,000 per year. Costs are incurred at a rate of $2,000 per year. Given an MARR of 10%, the benefit-cost ratio is closest to a) 2.17 b) 1.95 c) 2.00 d) 1.7 e) 0.90

3 10. A project will cost $50,000 initially. The benefits at the end of the first year are estimated to be $10,000, increasing at a rate of 10% in each of the following years for 8 years. Using a 10% interest rate, the simple payback period is closest to a) 1.45 b) 2.12 c) 4.25 d) 4.32 e) Before Tax Cash Flow = $20,000; Depreciation = $5,000; Tax Rate = 35%. The After Tax Cash Flow is closest to a) $14,750 b) $13,000 c) $18,250 d) $20,000 e) $ 9, Before Tax Cash Flow = $100,000; Depreciation = $15,000; Tax Rate = 35%. The After Tax Cash Flow is closest to a) $85,000 b) $65,000 c) $29,750 d) $70,250 e) $55, Before Tax Cash Flow = $20,000; Annual Loan Payment = $5,280; Current Year Loan Interest = $1,312; Depreciation = $5,000; Tax Rate = 35%. The After Tax Cash Flow is closest to a) $ 8,897 b) $13,688 c) $ 9,929 d) $ 8,617 e) $11, Before Tax Cash Flow = $15,000; Annual Loan Payment = $6,475 (based on a 10-year, $50,000 loan at 5% per year); Tax Rate = 35%. The After Tax Cash Flow in year 1 is closest to a) $ 5,000 b) $12,500 c) $ 3,525 d) $ 5,541 e) $ 4,150

4 15. When comparing identical data, Payback Period Analysis will always provide a consistent decision/choice with the other economic analysis techniques discussed in this course. a) True b) False c) Not enough information provided to appropriately answer this question 16. When comparing identical data, Net Present Worth Analysis, Annual Cash Flow Analysis, Rate of Return Analysis, and Benefit-Cost Analysis will always provide a consistent decision/choice. a) True b) False c) Not enough information provided to appropriately answer this question 17. Before Tax Cash Flow = a) Gross Income b) Gross Income Expenses c) Expenses Depreciation d) Expenses + Depreciation e) Gross Income Expenses Depreciation Use the following information for problems 18 and 19. For a given year, a copper mine in Arizona had gross income of $1,500,000 and expenses of $500,000. The standard depletion allowance for copper is 15%. 18. The allowable depletion for the year based on the Percent Method is closest to a) $750,000 b) $500,000 c) $150,000 d) $225,000 e) $1,000, The ceiling for the year based on the Percent Method is closest to a) $750,000 b) $500,000 c) $150,000 d) $225,000 e) $1,000,000

5 Use the following information for problems 20 and 21. Jimmy took out a 20-year mortgage for $225,000 at 6%, compounded monthly. Monthly payments were made on the loan. 20. The amount paid on principal in month 1 is closest to a) $ 486 b) $1,611 c) $1,125 d) $6,120 e) $ The amount paid in interest in month 2 is closest to a) $ 1,119 b) $ 1,111 c) $ 1,123 d) $ 1,125 e) $13, Current law states that a is funded with taxed contributions; however, the gains grow tax free. a) 401K b) BB7 c) 745A d) Roth IRA e) 403B 23. As of the close of the stock market on November 6, 2013, Baxter International, Inc. pays a quarterly dividend of $0.49. If the annual dividend yield is 2.997%, the price of the stock at the close of the market on November 6, 2013 is closest to a) $ 5.87 b) $ 1.46 c) $16.35 d) $ 6.11 e) $65.38

6 Use the following information for problems 24 and 25. Serenity Now, Inc. Happy Valley, Corp. Mountain Top, LLC EUAB $10,000 $12,700 $14,100 EUAC $9,000 $11,500 $13,000 B/C Given a comparison between alternatives from Serenity Now, Inc. and Happy Valley, Corp., the appropriate choice and associated benefit-cost necessary to make the choice, is a) Happy Valley, Corp.; 0.01 b) Happy Valley, Corp.; 1.10 c) Happy Valley, Corp.; 1.01 d) Happy Valley, Corp.; 1.08 e) Happy Valley, Corp.; 1.11 f) Serenity Now, Inc.; 0.01 g) Serenity Now, Inc.; 1.10 h) Serenity Now, Inc.; 1.01 i) Serenity Now, Inc.; 1.08 j) Serenity Now, Inc.; Given a comparison between alternatives from Mountain Top, LLC and Happy Valley, Corp., the appropriate choice and associated benefit-cost necessary to make the choice, is a) Happy Valley, Corp.; 0.02 b) Happy Valley, Corp.; 1.10 c) Happy Valley, Corp.; 0.93 d) Happy Valley, Corp.; 1.02 e) Happy Valley, Corp.; 1.08 f) Mountain Top, LLC; 0.02 g) Mountain Top, LLC; 1.10 h) Mountain Top, LLC; 0.93 i) Mountain Top, LLC; 1.02 j) Mountain Top, LLC; 1.08