CTP Long-Term Capital Investments 3

Question 1

When a firm uses MACRS depreciation for tax purposes, the accelerated depreciation in early years:

Accepted Answer

Increases present value of tax savings compared to straight-line

Answer

Accelerated depreciation front-loads tax deductions, increasing their present value since earlier tax savings are worth more than later ones.

Question 2

A project's operating cash flow (OCF) using the tax shield approach is calculated as:

Accepted Answer

(Sales − Costs − Depreciation) × (1 − T) + Depreciation

Answer

The tax shield formula isolates the depreciation tax shield: (Sales − Costs)(1−T) + Depreciation × T, equivalent to option B.

Question 3

Capital rationing occurs when a firm:

Accepted Answer

Restricts capital spending below the level needed to fund all positive-NPV projects

Answer

Capital rationing means the firm limits its total capital budget, forcing managers to select from among positive-NPV projects.

Question 4

Under capital rationing, which metric is MOST useful for ranking independent projects?

Accepted Answer

Profitability index

Answer

The profitability index (NPV/investment) ranks projects by value created per dollar invested, ideal when capital is constrained.

Question 5

A project has an initial outlay of $500,000 and generates after-tax cash flows of $100,000 per year for 7 years. What is the payback period?

Accepted Answer

5 years

Answer

$500,000 ÷ $100,000/year = 5 years payback period.

Certified Treasury Professional Exam Practice Test