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

A new inventory system will immediately reduce inventory levels by $100,000.If this reduction is permanent and the cost of capital is 13%,how does the net working capital change affect company value?

A project will always generate extra overhead costs.

The modified accelerated cost recovery system (MACRS)allows an increase:

When you finance a project partly with debt,you should still view the project as if it were all equity-financed,treating all cash outflows required for the project as coming from stockholders,and all cash inflows as going to them.

Corporate income statements are designed primarily to show:

When a depreciable asset is ultimately sold,the sales price is:

When calculating cash flow from operations,one should:

Sunk costs influence capital budgeting decisions only when the sunk costs exceed future cash inflows.

Which of the following statements regarding investment in working capital is incorrect?

New projects can have multiple effects on a firm.Which one of the following appears to be a positive indirect effect?

Suppose you finance a project partly with debt.You should neither subtract the debt proceeds from the project's required investment,nor would you recognize the interest and principal payments on the debt as cash outflows.

The additional inventory investment that is often required for new projects is partially offset by:

Investments in working capital,just like investments in plant and equipment,result in cash inflows.

Discounting real cash flows at a nominal rate is a serious mistake.

A firm plans to purchase a $50,000 asset that will be depreciated straight-line over a 5-year life to a zero salvage value.What is the present value of the resulting depreciation tax shield if the tax rate is 35% and the discount rate is 10%?

Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows.

An investment of $120,000 can be depreciated for tax purposes straight line over 6 years.The corporate tax rate is 40%.When calculating cash flow:

Sunk costs do not affect the net present value of a project.

A tax shield is equal to the reduction in a firm's:

A project is expected to increase inventory by $17,000,increase accounts payable by $10,000,and decrease accounts receivable by $1,000.What is the project's cash flow from net working capital at time zero?