Exam 9: Using Discounted Cash Flow Analysis to Make Investment Decisions

In project analysis, allocations of overhead should be limited to only those that represent additional expense.

What nominal annual return is required on an investment in order that an investor experiences a 12 percent gain in purchasing power? Assume inflation to be 4 percent.

Offer examples to confirm that firms do experience opportunity costs, even when cash payments are not explicitly made.

How should the cash flows of a proposed new project be calculated?

Your forecast shows $500,000 annually in sales for each of the next three years.If your second and third year predictions have failed to incorporate 2.5% expected annual inflation, how far off in total dollars is your three-year forecast?

A five-year project requires an additional commitment of $100,000 in net working capital.What is the present value opportunity cost associated with this investment?

One can continue to earn CCA tax shields from an asset sold from an existing pool if:

At current prices and a 13 percent cost of capital, a project's NPV is $100,000.By what minimum amount must the initial cost of the project decrease (revenues will be unchanged) before you would prefer to wait two years before investing?

A new, more efficient machine will last four years and allow inventory levels to decrease by $100,000 during its life.At a cost of capital of 13 percent, how does the net working capital change affect the project's NPV?

The total depreciation tax shield equals the product of depreciation and the tax rate.

Sunk costs do not affect project NPV.

Why is it likely that firms would use straight-line depreciation methods for depicting project analysis to shareholders or lenders, if such choice were possible?

The correct method to handle overhead costs in capital budgeting is to:

New projects or products can provide positive indirect effects as well as negative effects.Which of the following appears to be a positive indirect effect?

Which of the following is representative of how depreciation expense is handled in the face of inflation?

What is the present value at a 10 percent discount rate of the depreciation tax shield for a firm in the 35 percent tax bracket that purchases a $50,000 asset being depreciated at 15 percent declining balance with a half-year rule, disposed from the existing asset pool at zero?

Which of the following would not be expected to affect the decision of whether to undertake an investment?

A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35 percent tax rate.By how much does net cash flow deviate from net income?

Which of the following represents a common reason for increases in net working capital with new projects?

Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows.