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 Quiz
What does the term “cost basis” refer to in real estate – and how can you calculate your cost basis in any given property? It’s a smart question to ask, as your cost basis in real estate holdings effectively determines how much (if any) money you’ll potentially be expected to pay tax on upon the sale of your property or assets at a later date. It’s important to speak with an accountant or tax professional about taxes that may relate specifically to your sale. Let’s take a look at how the cost basis works and how to calculate it. What Is Cost Basis In Real Estate?
Cost basis is essentially defined as the amount that your property is worth from the standpoint of taxation. Upon the sale of a piece of real estate (for example, your single-family home residence) profit or loss is calculated by taking the property’s sales price and subtracting it from your cost basis on the date of sale. In essence, the bigger your cost basis is, the less your ultimate gains (a.k.a. profits) will be – and the less you’ll owe come tax time. Put simply: In real estate, the cost basis is the original value that a buyer pays for their property. It’s an important figure to know because homeowners who sell a residence or investment property must pay capital gains tax on any monies generated above and beyond what they initially paid for these assets. Think of cost basis as a measuring stick through which the Internal Revenue Service (IRS) will look to determine how much you’ve made in terms of gains on the sale of an asset such as a house, apartment or condo – and what portion of any given real estate property sale that it might hope to collect tax money on. An important point to keep in mind when calculating cost basis for homeowners is that the property owner’s cost basis increases by the cost of any capital improvements made to the property. Likewise, for investors, it’s also important to consider that the cost basis is the purchase price of any given property minus depreciation and tax credits. In other words, cost basis can change over time as well. To summarize, cost basis value is used in the calculation of capital gains or losses, which is the difference between the selling price and purchase price of your asset (i.e., your property). What Can Be Included In The Cost Basis Of A Property?
According to accounting pros, it’s important to consider your cost basis and how it’s computed as you contemplate a potential sale of your property and how much money you might receive from it. Your cost basis typically includes:
Adjusted BasisAs noted, your cost basis does not necessarily remain static, especially as time passes. If it changes, it becomes referred to as your adjusted basis. Your adjusted basis is a figure that takes additional factors into account when computing your capital investment in a property for tax purposes – factors that can add to or subtract from your original cost basis. Note that this amount can vary depending on how any money relating to your property is spent (like improvements to the property, repairs for damages, etc.) and may also be impacted by factors such as depreciation and insurance payouts. To calculate your adjusted basis:
Samples that can reduce your cost basis include:
On the flip side, factors that can increase your cost basis include:
Homeowners most commonly increase their cost basis by making significant improvements to their property that increase their home’s value, boost its lifespan or enable new uses for the property. Common improvements that might increase your cost basis include (but are not limited to) bathroom or kitchen upgrades, home additions, new roofing, the addition of a fence or desk, and various landscaping enhancements. How Cost Basis Changes
Numerous factors – like how you received or purchased a piece of property, whether the real estate was gifted, etc. – can impact your cost basis over time. Inherited Property Vs. Gifted PropertyInherited property is received upon the death of another party. Cost basis for an inheritance is fair market value at the time of their passing. Gifted property is given to you by another individual who does not receive full market value in return – it’s received as a gift, such as from a parent to a child. If a gain is incurred at the time a property is sold in the case of gifted property, the cost basis is the donor’s adjusted cost basis on the home. Should you incur a loss on the property instead, the basis is the lesser of either the donor’s adjusted cost basis or fair market value at the time the gift was made.
Calculating Cost Basis In Real Estate
Let’s take a look at an example when it comes to calculating the cost basis in real estate. Say Tim purchased a home for $300,000 and sold it 20 years later for $500,000. During the time that he was the homeowner, Tim put $30,000 worth of improvements into the property, including a new backyard fence and numerous kitchen and bathroom renovations, which increased his cost basis to $330,000. An insurance company also paid him $10,000 at one point to pay him back for damage to the roof done by an electrical storm – a payment which decreased his cost basis to $320,000. To calculate how much he might owe taxes upon, Tim subtracts his adjusted cost basis ($320,000) from the home’s ultimate selling price ($500,000) to determine the gain in profits he recognized ($180,000) by virtue of the sale. But in the event that the property had been gifted to him by his parents or received as an inheritance upon their death – or if he changed the use of the property from a personal residence to a business – Tim’s cost basis would be subject to alternate calculations and adjustments, as discussed above. The Bottom Line
Cost basis is important because it serves as a starting point (or endpoint in the case of your adjusted basis) for determining any profits or losses on the sale of real estate assets. Capital gains tax must be paid on these gains unless steps have been taken to make them subject to exemption. Bearing this in mind, it’s important to keep track of your cost basis as you make improvements to your home, or depreciate it to maximize short-term tax savings, as it will ultimately determine your basis for taxation at a later date. Likewise, your adjusted cost basis has the potential to wax and wane over time, which may impact how much you owe to the IRS overall. Looking to make the next move into real estate investing? Get approved with Rocket Mortgage® today. You can also give us a call at (833) 326-6018. Which of the following can be included in the depreciable basis of an asset?The depreciable basis is equal to the asset's purchase price, minus any discounts, and plus any sales taxes, delivery charges, and installation fees.
Which of the following measures the operating cash flow a project produces minus?Answer and Explanation: Free cash flow measures the operating cash flow a project minus the necessary investment in operating capital, and is as valid for proposed new projects as it is for the firm's current operations.
Which of these is the process of estimating expected future cash flows of a project?Discounted cash flow (DCF) refers to a valuation method that estimates the value of an investment using its expected future cash flows. DCF analysis attempts to determine the value of an investment today, based on projections of how much money that investment will generate in the future.
Which of these is used as a measure of the total amount of available cash flow from a project quizlet?substitutionary effects. Concerning incremental project cash flow, this is a cost one would never count as an expense of the project. This is used as a measure of the total amount of available cash flow from a project.
|