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

Assuming that an asset has been fully depreciated according to its straight line CCA class,which of the following statements is correct concerning the value of the asset:

Projects that are calculated as having negative NPVs should be:

What is the NPV of a project that costs $100,000,provides $23,000 in cash flows annually for six years,requires a $5,000 increase in net working capital,and depreciates the asset straight line over six years while ignoring the half-year convention? The discount rate is 14%.

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?

Assume that sales revenues are increasing more rapidly than product costs,but that a project's cash flows have been represented as an annuity when calculating NPV.Which of the following problems may occur?

When additional funds must be committed to working capital,those funds are assumed to be recovered at the end of the project's life.

How is the company's tax bill affected by capital cost allowance (CCA)and how does this affect project value?

Which of the following statements regarding investment in working capital is incorrect?

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

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?

Suppose you finance a project partly with debt,you should neither subtract the debt proceeds from the required investment,nor would you recognize the interest and principal payments on the debt as cash outflows.

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

A project that increased sales was accompanied by a $50,000 increase in inventory,a $20,000 increase in accounts receivable,and a $25,000 increase in accounts payable.Assuming these amounts remain constant,by how much has net working capital increased?

Which of the following would be more likely to make an unacceptable project appear acceptable?

When assets are sold from a CCA pool:

A parcel of corporate land was recently dedicated as the new plant site.What cost allocation should the land receive,based on the following: original cost of $200,000,market value of $300,000,net book value of $200,000,a recent offer to purchase for $250,000?

A new project requires an increase in both current assets and current liabilities of $125,000 each.What is the overall impact on net working capital investment?

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

For a profitable firm in the 35 percent marginal tax bracket with $100,000 of annual depreciation expense,the depreciation tax shield would be:

When is it appropriate to include sunk costs in the evaluation of a project?