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

If the discount rate is stated in nominal terms then-in order to calculate the NPV in a consistent manner-the project requires that:

What are some of the important points to remember while estimating the cash flows of a project?

Your firm expects to receive a cash flow in two years of $10,816 in nominal terms.If the real rate of interest is 2% and the inflation rate is 4%,what is the real cash flow for year 2?

A firm owns a building with a book value of $150,000 and a market value of $250,000.If the firm uses the building for a project,then its opportunity cost,ignoring taxes,is:

Briefly explain how inflation is treated consistently while estimating a project's NPV.

The rule for comparing machines with different lives is to select the machine with the greatest equivalent annual cost (EAC).

When a firm has the opportunity to add a project that will utilize excess factory capacity (that is currently not being used),which costs should be used to help determine if the added project should be undertaken?

For project Z,year 5 inventories increase by $6,000,accounts receivable by $4,000,and accounts payable by $3,000.Calculate the increase or decrease in working capital for year 5.

For project A in year 2,inventories increase by $12,000 and accounts payable increases by $2,000.Accounts receivable remain the same.Calculate the increase or decrease in net working capital for year 2.

If the nominal interest rate is 7.5% and the inflation rate is 4.0%,what is the real interest rate?

The NPV value obtained by discounting nominal cash flows using the nominal discount rate is the same as the NPV value obtained by discounting: I.real cash flows using the real discount rate; II.real cash flows using the nominal discount rate; III.nominal cash flows using the real discount rate

Briefly explain the acronym MACRS.

When calculating cash flows,one should consider all incidental effects.

If the discount rate is stated in real terms then-in order to calculate the NPV in a consistent manner-the project requires that:

A piece of capital equipment costing $400,000 today has no (zero)salvage value at the end of five years.If straight-line depreciation is used,what is the book value of the equipment at the end of three years?

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 year 3 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 11%.Assume that the asset can sell for book value at the end of the project.Calculate the approximate IRR for the project.

When calculating cash flows,one should consider them on an incremental basis.

Briefly explain how the cost of excess capacity is taken into consideration.

Working capital is a frequent source of errors in estimating project cash flows.These errors include: I.forgetting about working capital entirely; II.forgetting that working capital may change during the life of the project; III.forgetting that working capital is recovered at the end of the project; IV.forgetting to depreciate working capital

The real cash flow occurring in year 2 is $60,000.If the inflation rate is 5% per year and the real rate of interest is 2% per year,calculate the nominal cash flow for year 2.