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

Chan forecasts revenues of $320,000 a year.Variable costs will be $90,000.Create an income statement for the shop based on the estimates.The tax rate is 40 percent.

Recalculate the NPV for the proposal in question 94, now assuming that the $45,000 in annual revenues will grow at a 6 percent annual rate and that the $15,000 in annual expenses will grow at a 5 percent annual rate.Does this change your decision on the project? Explain the implications of the difference between the two questions' results. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cost -100,000 Charige in Workirg Capital -8,000 Reveruses 45,000 47,700 50,562 54,101 57,888 - Expenses 15,000 15,750 16,538 17,364 18,580 - Dep 19,000 19,000 19,000 19,000 19,000 = Pretax Profit 11,000 12,950 15,024 17,737 Taxes 3,850 4,533 5,258 6,208 7,108 Profit 7,150 9,766 11,529 13,200 Salvage Value 5,000 Tax effect 0 Cash Flows -108,000 26,150 24,417 28,766 30,529 45,200

Firms favour assets with high CCA rates because:

A project anticipates net cash flows of $10,000 at the end of year one, with such amount growing at the expected 5 percent rate of inflation over the subsequent four years.Calculate the real present value of this five-year cash stream if the firm employs a nominal discount rate of 15 percent.

Chan has been in the chemical industry for the past 22 years.Current employment total is 65 workers, and the current economic situation (inflation of 4 percent, nominal discount rate) has forced the company to close its doors.Chan however, must continue to pay health care costs for the next four years at a cost of $2,400 per worker, at an increasing rate of 3 percent above inflation.A consultant is called in to find the present value of this obligation.

Capital budgeting proposals should be evaluated as if the project were financed:

Why is it fairly easy to fall into the trap of discounting real cash flows with nominal rates?

Projects that are calculated as having negative NPVs should be:

How does net working capital affect the NPV of a five-year project if working capital is expected to increase by $25,000 and the firm has a 15% cost of capital?

Which of the following is not accurate in depicting cash flows from operations?

When you finance a project partly with debt, you should still view the project as if it were all equity-financed, treating all cash outflows required for the project as coming from stockholders, and all cash inflows as going to them.

Capital budgeting projects typically assume that all cash flows transpire at the end of the year.The reason for this is that:

If a project's cash flows include those triggered outside the project's incremental cash flows, it is likely that the:

Calculate the present value of the depreciation tax shield for an asset with a three-year estimated life costing $100,000.The firm has a 35 percent tax rate and a 10 percent cost of capital.Its CCA is 30 percent declining balance with a half-year rule.Compare this present value to that calculated for straight-line depreciation with no salvage value in both cases.

Sunk costs influence capital budgeting decisions when the sunk costs exceed future cash inflows.

In capital budgeting analysis, an increase in working capital can be shown as:

An asset's CCA class number affects its CCA dollar deduction amount from taxable income.

The "recovery" of an additional investment in working capital is assumed to:

Which of the following changes would be likely to increase the NPV of a project?

Capital budgeting analysis focuses on profits as opposed to cash flows.