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

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

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C

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?

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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.

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D

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%:

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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

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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?

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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

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Depreciation expense acts as a tax shield in reducing taxes.

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

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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):

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

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

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

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

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

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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?

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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%.

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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?

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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

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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.

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