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

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

What are some of the additional factors that an analyst should consider while estimating cash flows in foreign countries and currencies?

Two machines, A and B, which perform the same functions, have the following costs and lives. Type PV Costs Life Machine A \ 6,000 5 Machine B \ 8,000 7 Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15 percent.

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?

Briefly explain the acronym MACRS.

Sunk costs are bygones (i.e., they are unaffected by the decision to accept or reject a project).They should therefore be ignored.

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

The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a(n)

Costs incurred as a result of past irrevocable decisions and irrelevant to future decisions are called

Preferably, a financial analyst estimates cash flows for a project as

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?

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 percent.The real required rate of return is 10 percent.The inflation rate is 4 percent and is expected to be 4 percent forever.Sales and costs will increase at the rate of inflation.If the project costs $3,000, what is the NPV?

The real interest rate is 3 percent and the inflation rate is 5 percent.What is the nominal interest rate?

When Honda develops a new engine, the incidental effects might include the following:

Briefly explain how the decision to replace an existing machine is made.

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.

Investment in inventories includes investment in

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 percent and the inflation rate is 4 percent, what is the real cash flow for year 2?

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

Depreciation expense acts as a tax shield in reducing taxes.