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

A new project requires an increase in both current assets and current liabilities of $125,000 each. What is the overall impact on the net working capital investment?

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

Why is it likely that new firms use straight-line depreciation methods for reporting to shareholders?

Which one of the following statements regarding depreciation is correct?

A 5-year project requires an additional commitment of $100,000 in net working capital. What is the opportunity cost associated with this investment?

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?

Sunk costs remain the same whether or not you accept the project.

The NPV of an investment proposal becomes negative as a result of allocating a portion of the corporation president's salary. It is most likely the case that:

How should the value of a proposed new project be calculated?

You are evaluating a new project that will introduce a revolutionary new product that will be produced by a new, highly efficient machine. Which one of these will lower the net present value of that project?

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?

What rate of nominal growth is expected in sales if they are currently $1,000,000 and are expected to reach $1,600,000 in 5 years? Assume an inflation rate of 3.5%.

How is the company's tax bill affected by depreciation and how does this affect project value?

In the MACRS depreciation schedules, the depreciation percentage is lower in the first year than in the second year. This is due to the fact that:

The opportunity cost of an asset:

Offer examples to confirm that firms do experience opportunity costs, even when cash payments are not explicitly made.

Net working capital is expected to increase by $25,000 over the 5-year life of a project. What is the effect of net working capital on the project's net present value if the cost of capital is 15%?

Calculate the present value of the depreciation tax shield for an asset in the 3-year class life costing $100,000. Three-year class percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively for years 1 through 4. The firm has a 35% tax rate and a 10% cost of capital. Compare this present value to that calculated for straight-line depreciation with no salvage value.

Given a positive discount rate, which one of the following changes would increase the NPV of a project?

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