Exam 6: Making Investment Decisions With the Net Present Value Rule

Money that a firm has already spent,or committed to spend regardless of whether a project is taken,is called:

Two mutually exclusive projects have the following positive NPVs and project lives. Project NPV Life Project A \ 5,000 3 years Project B \ 6,500 5 years If the cost of capital were 15%,which project would you accept?

Important points to remember while estimating the cash flows of a project are: I.Only cash flow is relevant. II.Always estimate cash flows on an incremental basis. III.Be consistent in the treatment of inflation.

Suppose that a project has a depreciable investment of $1,000,000 and falls under the following MACRS year 5 class depreciation schedule: Year 1: 20%; year 2: 32%; year 3: 19.2%; year 4: 11.5%; year 5: 11.5%; and year 6: 5.8%. Calculate the depreciation tax shield for year 2 using a tax rate of 30%:

RainMan Inc.is in the business of producing rain upon request.They must decide between two investment projects: a new airplane for seeding rain clouds or a new weather control machine built by Dr.Nutzbaum.The discount rate for the new airplane is 9%,while the discount rate for the weather machine is 39% (it happens to have higher market risk).Which investment should the company select and why? (Assume a 0% inflation rate and that projected costs do not change over time.) Year Airplane Weather Machine 0 -900 -900 1 500 550 2 600 600 3 685

Capital equipment costing $250,000 today has 50,000 salvage value at the end of five years.If the straight-line depreciation method is used,what is the book value of the equipment at the end of two years?

Using the technique of equivalent annual cash flows and a discount rate of 7%,what is the value of the following project? Year 0 1 2 3 4 CF -22 8 9 11 13

Depreciation expense acts as a tax shield in reducing taxes.

The principal short-term assets are: i.cash; II)accounts receivable; III)inventories; and IV)accounts payable

A project requires an initial investment of $200,000 and expects to produce a cash flow before taxes of 120,000 per year for two years .The corporate tax rate is 30%.The assets will depreciate using the MACRS - 3-year schedule: (t = 1,33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%).The company's tax situation is such that it can use all applicable tax shields.The opportunity cost of capital is 12%.Assume that the asset can sell for book value at the end of the project.Calculate the NPV of the project (approximately):

A reduction in the sales of existing products caused by the introduction of a new product is an example of:

Opportunity costs should not be included in project analysis,as they are missed opportunities.

An analyst wishes to determine the value of resources used by a proposed project.Which values should the analyst use to approximate opportunity costs?

Most large U.S.corporations keep two separate sets of books,one for stockholders and one for the Internal Revenue Service.

Net working capital is best represented as: I.short-term assets; II.short-term liabilities; III.long-term assets; IV.long-term liabilities

Your boss asked you to evaluate a project with an infinite life.Sales and costs project to $1,000 and $500 per year,respectively.(Assume sales and costs occur at the end of the year,i.e.,profit of $500 at the end of year one.)There is no depreciation and the tax rate is 30%.The real required rate of return is 10%.The inflation rate is 4% and is expected to be 4% forever.Sales and costs will increase at the rate of inflation.If the project costs $3,000,what is the NPV?

Two machines,A and B,which perform the same functions,have the following costs and lives. Type PV Costs Life Machine A \ 6000 5 Machine B \ 8000 7 Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15%.

For the case of an electric car project,which of the following costs or cash flows should be categorized as incremental when analyzing whether to invest in the project?

Which of the following countries allows firms to keep two separate sets of books,one for the stockholders and one for the tax authorities like the Internal Revenue Service? i.U)S.; II)Japan; III)France

Suppose that a project has a depreciable investment of $600,000 and falls under the following MACRS year 5 class depreciation schedule: Year 1: 20%; year 2: 32%; year 3: 19.2%; year 4: 11.5%; year 5: 11.5%; and year 6: 5.8%. Calculate depreciation for year 2.