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

When evaluating mutually exclusive projects with positive NPV but different life spans, the proper technique to employ is the equivalent annual cash-flow approach.

How do you compare projects with different lives?

A financial analyst can use the equivalent annual cash-flow approach to determine the year in which an existing machine can be profitably replaced with a new machine.

The real rate of interest is 3 percent and inflation is 4 percent.What is the nominal rate of interest?

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?

Define the term cash flow for a project.

A financial analyst should include interest and dividend payments when calculating a project's cash flows.

If depreciation is $600,000 and the marginal tax rate is 35 percent, then the tax shield due to depreciation is

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

The Important point(s) to remember while estimating the cash flows of a project

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 percent.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 percent.Assume that the asset can sell for book value at the end of the project.Calculate the NPV of the project (approximately).

Working capital is needed for additional investment within a project and should be included within cash-flow estimates.

Working capital is a frequent source of errors in estimating project cash flows.These errors include

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

Working capital is one of the most common sources of mistakes in estimating project cash flows.

Given the following data for Project M calculate the NPV of the project. Cash flow in real terms: Real discount rate =5\% -200 150 120 Nominal discount rate =10\%

The equivalent annual cash-flow technique is primarily used whenever the lives of two different projects are the same.

The NPV value obtained by discounting nominal cash flows using the nominal discount rate is the same as the NPV value obtained by discounting

The principal short-term assets are