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

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% marginal tax rate?

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

In what manner does depreciation expense affect investment projects?

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

Although the rule seems very straightforward,why is it stated that financial managers often make the mistake of discounting real cash flows with nominal rates? Mention one common example,and state the effect that this has on project evaluation.

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?

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

An investment today of $25,000 promises to return $10,000 annually for the next 3 years.What is the approximate real rate of return on this investment if inflation averages 6% annually during the period?

How do changes in working capital affect project cash flows?

Your forecast shows $500,000 annually in sales for each of the next 3 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 3-year forecast?

The rationale for not including sunk costs in capital budgeting decisions is that they:

Upon the sale of equipment at the end of its useful life,tax liability will be incurred whenever the book value of the equipment exceeds the sales price.

Working capital will affect incremental cash flows if:

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

A cost should be considered sunk when it:

In the MACRS depreciation schedules,the depreciation percentage is lower in the first year than in the second year.This is due to the fact that:

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

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

The additional inventory investment that is often required for new projects can be partially funded by:

Assuming that an asset has been fully depreciated according to its MACRS class life,which of the following statements is correct concerning the value of the asset?