Chapter 12: Capital Budgeting and Estimating Cash FlowsJust click on the button next to each answer and you'll get immediate feedback.Note: Your browser must support JavaScript in order to use this quiz. Show
1.All of the following influence capital budgeting cash flows EXCEPT:accelerated depreciation. salvage value. tax rate changes. method of project financing used. 2.In proper capital budgeting analysis we evaluate incrementalaccounting income. cash flow. earnings. operating profit. 3.The estimated benefits from a project are expressed as cash flows instead of income flows because:it is simpler to calculate cash flows than income flows. it is cash, not accounting income, that is central to the firm's capital budgeting decision. this is required by the Internal Revenue Service. this is required by the Securities and Exchange Commission. 4.In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following EXCEPT:sunk costs. opportunity costs. changes in working capital resulting from the project, net of spontaneous changes in current liabilities. effects of inflation. 5.A capital investment is one thathas the prospect of long-term benefits. has the prospect of short-term benefits. is only undertaken by large corporations. applies only to investment in fixed assets. 6.Taxing authorities allow the fully installed cost of an asset to be written off for tax purposes. This amount is called the asset'scost of capital. initial cash outlay. depreciable basis. sunk cost. 7.Adam Smith is considering automating his pin factory with the purchase of a $475,000 machine. Shipping and installation would cost $5,000. Smith has calculated that automation would result in savings of $45,000 a year due to reduced scrap and $65,000 a year due to reduced labor costs. The machine has a useful life of 4 years and falls in the 3-year property class for MACRS depreciation purposes. The estimated final salvage value of the machine is $120,000. The firm's marginal tax rate is 34 percent. The incremental cash outflow at time period 0 is closest to$280,000. $380,000. $480,000. $580,000. 8.(See information in Question #7 above.) The "cost" of this asset that, by law, may be written off over time "for tax purposes" is closest to$280,000. $380,000. $480,000. $580,000. 9.In general, if a depreciable asset used in business is sold for more than its depreciated (tax) book value, any amount realized in excess of book value but less than the asset's depreciable basis is considered a"capital gain" and is taxed at the corporate capital gains tax. "recapture of depreciation" and is taxed at the corporate capital gains rate. "capital gain" and is taxed at a rate equal to the firm's ordinary tax rate, or a maximum of 35 percent. "recapture of depreciation" and is taxed at the firm's ordinary income tax rate. 10.Under the Modified Accelerated Cost Recovery System (MACRS), an asset in the "5-year property class" would typically be depreciated over years.four five six seven Retake Quiz Multiple-Choice Quiz questions are Copyright © by Pearson Education Limited. Used by permission. All rights reserved. Previous Quiz | Back to Main Index | Next QuizFixed assets are essential to the operation of virtually every kind of business—if you’re running a small-to-midsize business, you probably have at least one fixed asset. Here’s what fixed assets mean and why they matter for small business owners. What is a fixed asset?Fixed assets are items a company buys with the knowledge they’ll own them for more than a year. In even plainer language, fixed assets are things you can see and touch that your business plans to hold and use for a while. Fixed assets are often referred to as property, plant, and equipment, or PPE—the three most common kinds of fixed assets. For example, the fixed assets of a frozen cookie dough manufacturer might include a corporate office (property), a cookie dough factory (plant), and machines that make cookie dough (equipment). Fixed assets are also known as non-current assets—assets that can’t be easily converted into cash. Non-current assets can be intangible assets, like investments and intellectual property, as well as real estate and equipment. (In contrast, current assets are short-term assets that a company expects to use up, convert into cash, or sell within a year, like cash, cash equivalents, stock, or inventory.) Note that one company’s fixed asset might not count as a fixed asset for another company. For instance, a cybersecurity company might list computer equipment as a fixed asset. In contrast, an office supply business that sells computers wouldn’t, because the computer equipment, in this case, is the merchandise. Depreciation of fixed assetsBecause most fixed assets depreciate (i.e., decrease in value) over time (except land and real estate, which often hold or even increase in value over time), fixed assets can pose a bit of a problem on your company’s balance sheet. You don’t want to have a massive bump in the value of your assets one year, only to have it drop suddenly the next, setting off the balance of your book value. Instead, you can list fixed assets as line items over the period you own them. For example, a frozen cookie dough manufacturer might need a new industrial dough mixer—not a cheap investment—which would throw off their balance sheet if it were only listed for the year they buy it. Rather, the cookie company can estimate how much the mixer depreciates yearly due to normal wear and tear. They can then spread these numbers across the period they think they’ll use the mixer—perhaps over the next five years. This reflects the mixer's actual value to the company each year and prevents an imbalance that could give an inaccurate picture in their financial reporting. How do companies use fixed assets?You can use fixed assets for many different business purposes. Use cases tend to fall under the following three categories: 1. Goods productionIf a company makes and sells something, they have fixed assets they use to produce the goods. For example, for a coffee roasting company, a major fixed asset is their roaster, which it uses daily to roast their carefully sourced coffee beans. Other examples of fixed assets used for the production of supply or goods include:
2. Third-party rentalsWhile some businesses use their fixed assets, other businesses’ cash flow might rely on renting out their fixed assets to third parties. For example:
3. OrganizationFinally, almost all companies have some fixed assets they use to organize their business operations—perhaps to facilitate transactions, expedite work, or protect other assets. For example,the operational fixed assets of a tiny home goods store likely include a point-of-sale system, computers for owners and buyers, and a security system for the storefront. Advantages of fixed assetsFixed assets are generally very advantageous for businesses. For example, an artisan jewelry company can’t produce goods without a soldering gun. Significant advantages of owning fixed assets are:
Disadvantages of fixed assetsFixed assets also come with disadvantages, including:
Fixed assets FAQWhat are the types of fixed assets?Fixed assets usually fall under the umbrella of PPE, i.e., property, plant, and equipment. These are the three main types of fixed assets. What are some examples of fixed assets?Examples of fixed assets include land, machinery, vehicles, furniture, computer equipment, buildings, and other equipment. Fixed assets differ based on a company’s business operations. What are fixed asset liabilities?Fixed asset liabilities are the debts on fixed assets. For example, if you own a factory thanks to financing from the bank, your fixed asset liability is the money you still owe on the mortgage. Join 446,005 entrepreneurs who already have a head start.Get free online marketing tips and resources delivered directly to your inbox. No charge. Unsubscribe anytime. Which of the following is not a characteristic of a fixed asset?Answer and Explanation: The correct option is b. Use for less than one year. The fixed assets are the assets which held for the entire useful of the asset, or for more than one year.
What are the characteristics of fixed assets?Key characteristics of fixed assets. Fixed assets are generally tangible, physical things that have a useful life of more than one year.. They provide long-term financial benefit to the business and aren't sold to customers.. They're regarded as being illiquid in that they can't easily be converted into cash within a year.. Which of the following is not characteristic of an asset?It is not a required characteristic that it must have physical substance and be capable of being touched.
What are the 4 fixed assets?Examples of fixed assets include land, machinery, vehicles, furniture, computer equipment, buildings, and other equipment. Fixed assets differ based on a company's business operations.
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