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

Briefly explain how inflation is treated consistently while estimation the project NPV.

Germany allows firms to choose the following depreciation methods: i. Straight-line method, and II) Declining-balance method

The principal short-term assets are: I. Cash, II) Accounts receivable, III. Inventories, and IV. Accounts Payable

Briefly explain the acronym MACRS.

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

When calculating cash flows, it is important to consider them on an incremental basis.

A project requires an initial investment of $200,000 and is expected to produce a cash flow before taxes of 120,000 per year for two years. [i.e. cash flows will occur at t = 1 and t = 2]) The corporate tax rate is 30%. The assets will be depreciated using 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 make use of all applicable tax shields. The opportunity cost of capital is 12%. Assume that the asset can be sold for book value. Calculate the NPV of the project: (Approximately)

Which of the following countries allow firms to keep two separate sets of books, one for the stockholders and one for the tax authorities like the Internal Revenue Service? I. U.S.A., II) Japan, and III. France

If the discount rate is stated in real terms, then in order to calculate the NPV in a consistent manner requires that project: I. cash flows be estimated in nominal terms II. cash flows be estimated in real terms III. accounting income be used

A project requires an initial investment of $200,000 and is expected to produce a cash flow before taxes of 120,000 per year for two years. [i.e. cash flows will occur at t = 1 and t = 2]) The corporate tax rate is 30%. The assets will be depreciated using 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 make use of all applicable tax shields. The opportunity cost of capital is 11%. Assume that the asset can be sold for book value. Calculate the IRR for the project: (approximately)

The cost that is incurred as a result of past, irrevocable decisions and is irrelevant to future decisions is called:

Briefly explain how the decision to replace an existing machine is made?

Real cash flow occurring in year-2 is $60,000. If the inflation rate is 5% per year, the real rate of interest is 2%, calculate the cash flow for the year-2.

Net Working Capital is the: I. short-term assets II. short term liabilities III. long-term assets IV. long term liabilities

If the nominal interest rate is 7. 5% and the inflation rate is 4%, what is the real interest rate?

Equivalent annual cash flows are used whenever the lives of projects are the same.

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 determine if the added project should be undertaken?

You have been asked to evaluate a project with infinite life. Sales and costs are projected to be $1000 and $500 respectively. There is no depreciation and the tax rate is 30%. The real required rate of return is 10%. The inflation rate is 4% and is expected to be 4% forever. Sales and costs will increase at the rate of inflation. If the project costs $3000, what is the NPV?

For example, in case of an electric car project, the following cash flows should be treated as incremental flows when deciding whether to go ahead with the project except:

When evaluating a projects with positive NPV but variable life spans, the proper technique to employ is the equivalent annual annuity (EAA) approach.