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

If the adoption of a new product will reduce the sales of an existing product, then the projected sales on the pro forma statement should:

The likely effect of discounting nominal cash flows with real interest rates will be to:

The rationale for not including sunk costs in capital budgeting decisions is that they:

The income statement of an all-equity firm reflects sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and an average tax rate of 18%. By how much does operating cash flow deviate from net income?

The present value of the total depreciation tax shield will be higher when an asset uses MACRS than when depreciated straight-line.

A proposed project requires an initial investment of $8,500 in current assets, 75% of which will be financed with accounts payable. The project will have:

What is the annual depreciation tax shield for a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense?

The opportunity cost of a resource should be considered in project analysis, unless:

Assume that a project's sales revenues are expected to increase more rapidly than product costs, but the project's cash flows have been represented as a fixed annuity when calculating NPV. Which one of the following problems might exist within this analysis?

When the real rate of interest is less than the nominal rate of interest, then:

An investment today of $25,000 promises to return $10,000 annually for the next 3 years. What is the real rate of return on this investment if inflation averages 6% annually during the period?

Which one of the following categories would be least likely to require annual adjustments in a capital budgeting analysis due to the effects of inflation?

When is it appropriate to include sunk costs in the evaluation of a project?

How can the cash flows of a project be computed from standard financial statements?

Allocations of overhead should not affect a project's incremental cash flows unless the:

At current prices and a 13% cost of capital, a project's NPV is $100,000. By what minimum amount must the initial cost of the project decrease before you would wait 2 years to invest? Assume all else is held constant.

Which one of the following would not be expected to affect the decision of whether to undertake an investment?

Which of the following costs probably should not be allocated to the investment needed for a new project?

A profitable firm is considering a 7-year project that requires $135,000 of new equipment which will be depreciated as MACRS 5-year property, after which time it will be worthless. When will this equipment affect the project's cash flows?

Methods of accelerated depreciation: