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

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

Sunk costs are bygones, they are unaffected by the decision to accept or reject and should be ignored.

If the depreciation amount is $100,000 and the marginal tax rate is 35%, then the tax shield due to depreciation is:

Investment in net working capital is not depreciated because:

For project Z, year-5 inventories increase by $6,000, accounts receivables by $4,000 and accounts payables by $3,000. Calculate the increase or decrease in working capital for year-5.

What are some of the important points to remember while estimating the cash flows of a project?

Working capital is one of the most common causes of misunderstanding in estimating project cash flows. The following are the most common errors: I. forgetting about working capital entirely II. forgetting that working capital may change during the life of the project III. forgetting that working capital is recovered at the end of the project IV. forgetting to depreciate the working capital

The real rate of interest is 3% and the inflation is 4%. What is the nominal rate of interest?

Given the following data for Project M:

If the depreciable investment is $600,000 and the MACRS 5-Year class schedule is: Year-1: 20%; Year-2: 32%; Year-3: 19.2%; Year-4: 11.5%; Year-5: 11.5% and Year-6: 5.8% Calculate the depreciation for Year-2.

Depreciation acts as a tax shield in reducing the taxes.

The value of a previously purchased machine to be used by a proposed project is an example of:

In the case of freely traded resources, opportunity cost is the:

Briefly discuss how taxes are taken into consideration in countries like Japan.

When calculating cash flows, it is important to consider all incidental effects.

Money that a firm has already spent or committed to spend regardless of whether a project is taken is called:

All large U.S. corporations keep two separate sets of books, one for the stockholders and one for the Internal Revenue Service.

If the depreciable investment is $1,000,000 and the MACRS 5-Year class schedule is: Year-1: 20%; Year-2: 32%; Year-3: 19.2%; Year-4: 11.5%; Year-5: 11.5% and Year-6: 5.8% Calculate the depreciation tax shield for Year-2 using a tax rate of 30%:

If the depreciation amount is 600,000 and the marginal tax rate is 35%, then the tax shield due to depreciation is:

For project A in year-2, inventories increase by $12,000 and accounts payable by $2,000. Calculate the increase or decrease in net working capital for year-2.