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

Germany allows firms to choose the following depreciation methods: I. Straight-line method II. Declining-balance method

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%:

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.

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

OM Construction Company must choose between two types of cranes. Crane A costs $600,000, will last for 5 years, and will require $60,000 in maintenance each year. Crane B costs $750,000 and will last for seven years and will require $30,000 in maintenance each year. Maintenance costs for cranes A and B are incurred at the end of each year. The appropriate discount rate is 12% per year. Which machine should OM Construction purchase?

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?

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

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:

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

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

A firm has a general-purpose machine, which has a book value of $300,000 and is sold for $500,000 in the market. If the tax rate is 35%, what is the opportunity cost of using the machine in a project?

Important points to remember while estimating cash flows of projects are: I. only cash flow is relevant II. always estimate cash flows on an incremental basis III. be consistent in the treatment of inflation