Exam 6: Making Investment Decisions With the Net Present Value Rule

If the discount rate is stated in nominal terms, then in order to calculate the NPV in a consistent manner, the project requires that

A project requires an initial investment of $200,000 and expects to produce a cash flow before taxes of $120,000 per year for two years . The corporate tax rate is 21 percent. The assets will depreciate using the MACRS year 3 schedule: (t = 1: 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is such that it can use all applicable tax shields. The opportunity cost of capital is 11 percent. Assume that the asset can sell for book value at the end of the project. Calculate the approximate IRR for the project.

Briefly explain the acronym MACRS.

Working capital is a frequent source of errors in estimating project cash flows. These errors include

Your firm expects to receive a cash flow in two years of $10,816 in nominal terms. If the real rate of interest is 2 percent and the inflation rate is 4 percent, what is the real cash flow for year 2?

The real interest rate is 3 percent and the inflation rate is 5 percent. What is the nominal interest rate?

When calculating cash flows, one should consider all incidental effects.

Two mutually exclusive projects have the following positive NPVs and project lives. If the cost of capital were 15 percent, which project would you accept?

Briefly explain how the cost of excess capacity is taken into consideration.

Given the following data for Project M calculate the NPV of the project.

A financial analyst can use the equivalent annual cash-flow approach to determine the year in which an existing machine can be profitably replaced with a new machine.

If depreciation is $100,000 and the marginal tax rate is 21 percent, then the tax shield due to depreciation is

A reduction in the sales of existing products caused by the introduction of a new product is an example of

A firm owns a building with a book value of $150,000 and a market value of $250,000. If the firm uses the building for a project, then its opportunity cost, ignoring taxes, is

When a firm has the opportunity to add a project that will utilize excess factory capacity (that is currently not being used), which costs should be used to help determine if the added project should be undertaken?

A project requires an initial investment of $200,000 and expects to produce a cash flow before taxes of $120,000 per year for two years . The corporate tax rate is 21 percent. The assets will depreciate using the MACRS 3-year schedule: (t = 1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is such that it can use all applicable tax shields. The opportunity cost of capital is 12 percent. Assume that the asset can sell for book value at the end of the project. Calculate the NPV of the project (approximately).

Using the technique of equivalent annual cash flows and a discount rate of 7 percent, what is the value of the following project?

For the case of an electric car project, which of the following costs or cash flows should be categorized as incremental when analyzing whether to invest in the project?

Working capital is needed for additional investment within a project and should be included within cash-flow estimates.

Given the following data for Project M calculate the NPV of the project.