52) Johnson's Mini Mart is considering the purchase of a new electronic bar code scanner that will keep detailed records of every sale transaction. The scanner is likely to have little effect on operating revenues and expenses. Its acquisition is primarily for increasing management information about sales. The scanner costs $4,600 and would be included in Class 10 for tax purposes. Johnson's accountant has stated that due to the fast write-off of Class 10 assets (30% CCA rate), its real cost is less than $4,600.
Due to technological obsolescence, it would have zero salvage value.
a.Since the bar code scanner cannot produce a profit or even show short run savings, should it even be evaluated as a capital budgeting expenditure? Explain.
b.Explain whether or not the real cost is less than $4,600.
c.If the company has a 40 percent tax rate and a 10% discount rate, compute the real cost of the bar code scanner. Assume there would be other assets in the class.
53) Explain why the term tax shield is used in conjunction with amortization.
22.2 Apply the total-project approach and the differential approach appropriately to different capital budgeting decisions.
1) The total project approach calculates the future value of cash outflows and inflows that differ between the alternatives of using the old machine and replacing the old machine.
2) The differential approach calculates the present value of all cash inflows and outflows under each alternative.
3) The differential approach is based on the concept of relevance.
4) A company is considering the purchase of some equipment that in the second year of operation should cause an increase in sales of $200,000, an increase in cash expenses of $120,000, and CCA of $60,000. If the appropriate tax rate is 40%, what will be the after-tax effect on net income in year two?
A) no effect
B) net after-tax inflows of $72,000
C) net after-tax inflows of $12,000
D) net after-tax inflows of $20,000
E) net after-tax inflows of $50,000