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

Working capital is needed additional investment in the project and should considered for cash flow estimation.

In the MACRS system of depreciation most industrial equipment fall into the ten- and fifteen-year classes.

Two mutually exclusive projects have the following NPVs and project lives. Project NPV Life Project A \ 5,000 3 years Project B \ 6,500 5 years If the cost of capital is 15%, which project would you accept?

Define the term cash flow for a project.

Equivalent annual cash flow approach can be used to determine the year in which the existing machine can be profitably replaced with a new machine.

Net Working Capital should be considered in project cash flows because:

A project requires an investment of $900 today. It has sales of $1,100 per year forever. Costs will be $600 the first year and increase by 20% per year. Ignoring taxes calculate the NPV of the project at 12% discount rate.

Preferably, cash flows for a project are estimated as:

Do not forget to include interest and dividend payments when calculating the project's cash flows.

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.

Given the following data for Project M: \begin{array}{c}\begin{array}{lll}\\ \text {Cash flow in nominal terms:}\\\text {Real discount rate =\mathbf{5} \% }\\\text {Nominal discount rate \( =10 \% \)}\\\text {Calculate the NPV of the project}\end{array}\begin{array}{lll}C_{0} & C_{1} & C_{2} \\-100 & 75 & 60\\\\\\\\\end{array}\end{array}

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

A cash flow received in two years is expected to be $10,816 in nominal terms. If the real rate of interest is 2% and the inflation rate is 4%, what is the real cash flow for year-2?

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

The NPV value obtained by discounting nominal cash flows using the nominal discount rate is the: I. same as the NPV value obtained by discounting real cash flows using the real discount rate II) same as the NPV value obtained by discounting real cash flows using the nominal discount rate III. same as the NPV value obtained by discounting nominal cash flows using the real discount rate

You are considering the purchase of one of two machines required in your production process. Machine A has a life of two years. Machine A costs $50 initially and then $70 per year in maintenance. Machine B has an initial cost of $90. It requires $40 in maintenance for each year of its 3 year life. Either machine must be replaced at the end of its life. Which is the better machine for the firm? The discount rate is 15% and the tax rate is zero.

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

For example, when Honda develops a new engine, the incidental effects might include the following: I. demand for replacement parts II. profitable service facilities III. offer modified or improved versions of the engine for other uses

Briefly explain the difference between an equivalent annual cost and an equivalent annual annuity.

Investment in inventories includes investment in: I) Raw material II) Work-in-progress III) Finished goods