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

Assume your firm has an unused machine that originally cost $75,000,has a book value of $20,000,and a market value of $25,000.Ignoring taxes,what is the opportunity cost of using this machine?

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 the 3% expected annual inflation,how far off in total dollar sales is your 3-year forecast?

Allocations of overheads should not affect a project's incremental cash flows unless the:

Why is accelerated depreciation often favored for the corporation's set of tax books?

Discounting real cash flows with real interest rates provides an overly optimistic idea of a project's value.

What is the NPV of a 6-year project that costs $100,000,has annual revenues of $50,000 and costs of $15,000? Assume the investment can be depreciated for tax purposes straight-line over 6 years,the corporate tax rate is 35%,and the discount rate is 14%.

If inflation is forecast to increase,which of the company's following cash flows is most likely to change?

You are considering the introduction of a new product that will require an investment in new machinery.Which one of these will lower the net present value of that project?

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

What is the operating cash flow for a firm with $500,000 profit before tax,$100,000 depreciation expense,and a 35% marginal tax rate?

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

The present value of the total depreciation tax shield will be higher when an asset uses MACRS than when depreciated straight-line.

Which one of these represents a cash outflow for a project?

When is it appropriate to include sunk costs in the evaluation of a project?

Investments in working capital:

Which one of these statements is incorrect?

Which of the following correctly adjusts for depreciation when calculating a project's operating cash flow?

When you evaluate a proposed project you should:

Lew's Metals has a machine sitting idle in its warehouse.The machine originally cost $213,000,has a current book value of $32,300,has a scrap metal value of $13,000,and a market value of $46,900.The machine is totally paid for.What value should be placed on this machine if it is used for a new project?

Which one of the following changes in working capital is least likely if sales increase?