ISEN 302 EXAM 03

T/F MACRS-ADS is based on straight-line depreciation with a longer recovery period than MACRS-GDS.

T

T/F When using declining balance depreciation, the book value of an asset can never be equal to the salvage value.

F Reasoning: You may be able to force the book value = salvage value by using the appropriate p if p <= pmax.

T/F MACRS is the most commonly used method in the United States for financial reporting.

F Reasoning: Straight-line is the most common method for financial reporting due to its simplicity.

T/F A 5-year MACRS-GDS property class takes 7 years to be fully depreciated due to the half-year convention at the first and the last year.

F Reasoning: it takes one extra time period, therefore it takes 6 years (not 7). In the first and last years you depreciate half-year only.

T/F When using MACRS-GDS depreciation for real properties we adopt half-year convention.

F Reasoning: for real properties, half-month convention is adopted.

T/F Salvage value is the estimated market value at the end of the asset's useful life.

T

T/F Defender is the potential replacement asset being compared in a replacement analysis.

F Reasoning: defender is the current asset being compared.

T/F Functional obsolescence may result from physical deterioration of the defender.

T

T/F The equivalent uniform annual cost is equal to the sum of operating and maintenance costs and costs of ownership.

T

T/F The optimum replacement interval of an asset does not change regardless of the planning horizon used.

F Reasoning: the ORI may change.

T/F The only difference between the cash flow approach and the opportunity cost approach for replacement analysis is in how the salvage value of the defender is treated.

T

T/F Lease payments are always expensed.

T

T/F When using Declining Balance, the value of an asset decreases by a constant rate.

T

T/F Double Declining Balance method (DDB) is just a special case of Declining Balance method, where the depreciation rate is twice the declining balance depreciation rate.

F Reasoning: the depreciation rate is twice the straight-line depreciation rate (not the DB depreciation rate).

T/F Although interests paid by business are not real cash flows, they can be deducted from taxable income.

F Reasoning: interest payments are real cash flows.

T/F The tax rate that applies to the last dollar is called the Ultimate Tax Rate.

F Reasoning: it is called marginal tax rate. There is no Ultimate Tax Rate.

T/F In after-tax analysis using borrowed capital (loan), loan cash flows as well as depreciation allowances are deducted from taxable income.

F Reasoning: depreciation allowances and interest payments are deducted from taxable income, however, principal payments, which are part of loan cash flows, cannot be deducted.

T/F Book loss is the term used to refer to the loss that occurs then the salvage value is smaller than the book value and this value can be deducted from the Taxable Income.

T

T/F If a depreciable property is disposed before the end of the recovery period, when using MACRS depreciation a half-year depreciation allowance is allowed in the year of disposal.

T Reasoning: only a half-year depreciation allowance is allowed in this case.

When using straight-line depreciation, the book value is always equal to ________________.

Salvage Value

When using MACRS-GDS depreciation, the book value is always equal to _____________.

zero

Cash Flow Approach is also known as

Insider Viewpoint

Opportunity Cost Approach is also known as

Outsider viewpoint

Which of the following is NOT an approach to replacement analysis?

a. Cash flow approach

b. Outsider cost approach

c. Insider's viewpoint

d. Outsider's viewpoint

B

Which cost categories form the trade-off that leads to an ORI?

a. Operating & maintenance costs and opportunity costs

b. Direct costs and indirect costs

c. Insider costs and outsider costs

d. Operating & maintenance costs and capital recovery costs

D

T/F The more expensive it becomes to operate and maintain an equipment, the later it needs to be replaced.

F

T/F Implicit in the procedure we use to obtain the ORI is an assumption that subsequent replacements will have identical cash flow profiles.

T

T/F One must calculate the PW to find the ORI when the planning horizon is fixed and not equal to a multiple of the ORI value obtained.

T

T/F The two replacement analysis approaches differ in how the salvage value of the challenger is treated.

F

The ownership costs (or capital recovery costs) are composed by different cash flows. Select all that apply:

a. Salvage value

b. Sunk costs

c. Initial investment

d. Maintenance costs

A & C

T/F The main reason for discussing depreciation is to support the development of a reasonably accurate report to the owners of a business regarding its business value at any given point in time.

F Main reason: after-tax analysis/impact of taxable income

T/F Depreciation spreads investment costs over the useful life of the equipment purchased.

T

T/F Depreciation allowances can be treated as expenses because they are cash flows.

F They can be treated as expenses because they affect taxable income, which is a cash flow. But depreciation allowances are not cash flows.

T/F Depreciation affects income taxes, which are cash flows.

T

T/F Book value is the undepreciated portion of an asset.

T

T/F Land is a tangible property with life longer than 1 year and therefore it qualifies for depreciation.

F

Which of the following is not a requirement for an asset to be depreciable?

a. It must have a cost basis greater than $10,000

b. It must be held with the intent to produce income

c. It must wear out or get used up

d. It must have a life longer than 1 year

A

MACRS-GDS allowances are a combination of which other methods of depreciation? (1.0 its)

a. Sum of Years Digits and Straight Line

b. Declining balance and after tax

c. Declining balance and straight line

d. Double declining balance and 150% declining balance

C

Which of the following is not true about depreciation? (1.0 its)

a. Depreciation is not a cash flow

b. The book value at the end of the recovery period always equals to the salvage value,

regardless of the depreciation method used

c. A 5-year property will generate a regular MACRS-GDS depreciation charges in six fiscal years d. For straight-line depreciation, an estimate of the salvage value is required

B

5. Which of the following is (are) required to calculate MACRS-GDS depreciation deductions?

I. Property Class

II. Salvage Value

III. First Cost

IV. Annual Maintenance Cost

I and III