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

Opportunity costs are evaluated for investment decisions at their historical (that is, book) cost.

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

Higher depreciation rates:

Determine the change in net working capital that appears warranted for the following proposed project: Inventory levels will increase 20% from their current value of $500,000; cash will increase by $25,000; wage accruals will increase by $60,000; machinery will increase by $75,000; accounts receivable-because of a new collection system-will increase by only $15,000; accounts payable will increase by $45,000.What happens to net working capital at the end of the project's life?

A company purchases equipment to be used in business operations for $4,800,000.The equipment has a CCA rate of 45%.You intend to sell the equipment in year 5 for a salvage value of $95,000.At the time of sale, you still anticipate having other assets in the class.Tax rate is 40%.Company uses a 10% rate of return.Determine the present value of the incremental tax shields generated.

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?

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?

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

What is the net effect on a firm's working capital if a new project requires: $30,000 increase in inventory, $10,000 increase in accounts receivable, $25,000 increase in machinery, and a $20,000 increase in accounts payable?

The likely effect of discounting nominal cash flows with real interest rates will be to:

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

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?

Projects that are calculated as having negative NPVs should be:

Recaptured depreciation and terminal loss occur when:

What is the amount of the annual depreciation tax shield for a firm with $200,000 in net income, $75,000 in depreciation expense and a 35 percent marginal tax rate?

Firms favour assets with high CCA rates because:

Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and is currently worth $25,000.Ignoring taxes, the correct opportunity cost for this machine in capital budgeting decisions is:

Adding depreciation expense to net profit equals:

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

If a project is expected to increase inventory by $15,000, increase accounts payable by $10,000, and decrease accounts receivable by $1,000, what effect does working capital have during the life of the project?