1. Quiz 4 Answers
November 8, 2013

2. At the beginning of the year, a pie company has $P in the bank
At the beginning of the year, a pie company has $P in the bank. During the year it takes in $A for pie sales. It pays $B for pie ingredients, and $C for wages and rent. It pays taxes at t%. At the end of the year, the amount the company has in the bank is:
P + (A-B-C)t
(P+A)t – B - C
P + (A-B-C)(1-t)
P + A – Bt - Ct

3. A
A-B-C
B+C
(A-B-C)(1-t)
After-Tax
Analysis

4. A pie company, otherwise identical to the pie company in the previous question, also has an oven, purchased 10 years ago, which according to Revenue Canada rules depreciated by $D during the year. At the end of the year, the amount the company has in the bank is:
P + (A-B-C-D)t
(P+A)t – B – C - D
P + (A-B-C-D)(1-t) + D
P + A – (B+C+D)t

5. A
B+C
A-B-C D
A-B-C-D
(A-B-C-D)(1-t)
(A-B-C-D)(1-t)+D

6. Yet a third pie company starts off the year with $P
Yet a third pie company starts off the year with $P. It sells $A in pies, and pays no wages or rent, but it does buys an oven for $F. If Revenue Canada allows ovens to depreciate at d% per year, at the end of the year, the amount the company has in the bank is:
P + A(1-t) - F
P + (A-F)(1-t)
P +A(1-t) –F(CTF)
P + (A-Fd/2)(1-t) – F + Fd/2

7. A
A-Fd/2
Fd/2
(A-Fd/2)(1-t)
(A-Fd/2)(1-t)+Fd/2 - F F

8. A fourth pie company starts the year with $P and an oven whose undepreciated capital cost (UCC) is $G. It sells $A in pies, and pays no wages or rent, but it does sell the oven for $G. At the end of the year, the amount the company has in the bank is:
P + A(1-t) + G
P + A + G(CSF)
P + A(1-t) + G(CTF)
P + (A+G)(1-t)

9. If we now sell it for $S, then: 1. If S < UCC(n), no tax is owed.
CCA Recapture
You buy an asset for $P. It is the only asset in its class, and it depreciates over n years. At the beginning of year n, its book value is UCC(n)
If we now sell it for $S, then:
1. If S < UCC(n), no tax is owed.
2. If P > S > UCC(n), you owe tax on S-UCC(n)
3. If S > P, you owe tax on P – UCC(n), and
S-P is a capital gain.
Draw diagram

10. A A
A(1-t)
A (1-t)+G

11. A fifth pie company starts the year with $P and an oven whose undepreciated capital cost (UCC) is $G. (This oven was originally bought for $3G.) It sells $A in pies, and pays no wages or rent, but it does sell the oven for $2G. At the end of the year, the amount the company has in the bank is:
P + A(1-t) + 2G
P + A + 2G(CSF)
P + A(1-t) + 2G(CSF)
P + (A+G)(1-t) + G

12. If we now sell it for $S, then: 1. If S < UCC(n), no tax is owed.
CCA Recapture
You buy an asset for $P. It is the only asset in its class, and it depreciates over n years. At the beginning of year n, its book value is UCC(n)
If we now sell it for $S, then:
1. If S < UCC(n), no tax is owed.
2. If P > S > UCC(n), you owe tax on S-UCC(n)
3. If S > P, you owe tax on P – UCC(n), and
S-P is a capital gain.
Draw diagram

13. A+G
A+G
(A+G)(1-t)
(A+G) (1-t)+G

14. A sixth pie company starts the year with $P and an oven whose undepreciated capital cost (UCC) is $G. (This oven was originally bought for $2G.) It sells $A in pies, and pays no wages or rent, but it does sell the oven for $3G. At the end of the year, the amount the company has in the bank is:
P + A(1-t) + 3G
P + A + 3G(CSF)
P + (A+2G)(1-t) + G(1-t/2)
P + (A+G)(1-t) + G

15. S-P is a capital gain. (Taxed at half the rate for profits)
CCA Recapture
You buy an asset for $P. It is the only asset in its class, and it depreciates over n years. At the beginning of year n, its book value is UCC(n)
If we now sell it for $S, then:
1. If S < UCC(n), no tax is owed.
2. If P > S > UCC(n), you owe tax on S-UCC(n)
3. If S > P, you owe tax on P – UCC(n), and
S-P is a capital gain. (Taxed at half the rate for profits)
Draw diagram

16. A+G
A+G
(A+G)(1-t)
(A+G) (1-t)+G+G(1-t/2)

17. I have a profitable company, and have just calculated the CTF to be used in after-tax analyses of possible expansion plans. Now I learn that inflation is predicted to be higher than I expected during the coming few years. If I correct my calculations to take inflation into account, the inflation-adjusted CTF will be:
Higher than the original CTF
Lower than the original CTF
Unchanged
Can’t say without additional information

18. I have a profitable company, and have just calculated the CTF to be used in after-tax analyses of possible expansion plans. Now I learn that inflation is predicted to be higher than I expected during the coming few years. If I correct my calculations to take inflation into account, the inflation-adjusted CTF will be:
Higher than the original CTF
Lower than the original CTF
Unchanged
Can’t say without additional information

19. If the taxation rate for a company increases, the value of the CTF for that company will:
Increase
Decrease
Remain the same
Can’t tell without more information

20. If the taxation rate for a company increases, the value of the CTF for that company will:
Increase
Decrease
Remain the same
Can’t tell without more information

21. If a company learns that there will be inflation over the next few years, the value of the CTF it uses in its after-tax analyses will:
Increase
Decrease
Remain the same
Can’t tell without more information

22. If a company learns that there will be inflation over the next few years, the value of the CTF it uses in its after-tax analyses will:
Increase
Decrease
Remain the same
Can’t tell without more information

23. I have just calculated the IRR for a project, using a pre-tax analysis
I have just calculated the IRR for a project, using a pre-tax analysis. If I am taxed at 50%, when I calculate the after-tax IRR, it will be:
Higher than the pre-tax IRR
Lower than the pre-tax IRR
Unchanged
Can’t say without additional information

24. After-tax IRR lower S P
S(1-t)
P * CTF

25. After-tax IRR higher S P
S (capital gain)
P * CTF

26. I have just calculated the IRR for a project, using a pre-tax analysis
I have just calculated the IRR for a project, using a pre-tax analysis. If I am taxed at 50%, when I calculate the after-tax IRR, it will be:
Higher than the pre-tax IRR
Lower than the pre-tax IRR
Unchanged
Can’t say without additional information