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

When additional funds must be committed to working capital, those funds are assumed to be recovered at the end of the project's life.

The recovery of an additional investment in working capital is assumed to:

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?

As a project comes to its end, there is a disinvestment in working capital, which also generates positive cash flow as inventories are sold off and accounts receivable are collected.

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

Which one of the following formulas is incorrect?

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%?

The present value of the depreciation tax shield at any given discount rate is:

Why is it fairly easy to fall into the trap of discounting real cash flows with nominal rates?

For an all-equity firm, adding depreciation expense to net profit equals:

Assuming an asset has been fully depreciated according to its MACRS class life, which one of the following statements is correct concerning the current value of the asset?

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

Which one of these statements is incorrect?

The additional inventory investment that is often required for new projects can be partially funded by:

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

What is the undiscounted cash flow in the final year of an investment, assuming $10,000 after-tax cash flows from operations, $1,000 from the sale of a fully depreciated machine, $2,000 initial requirement for additional working capital, and a 35% tax rate?

How do changes in working capital affect project cash flows?

New projects or products can provide positive indirect effects as well as negative effects. Which one of the following appears to be a negative indirect effect?

When you evaluate a proposed project you should:

Changes in net working capital can occur at: