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

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Question 21

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You should replace a machine when the EAC of continuing to operate it exceeds the EAC of the new machine.

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Question 22

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Briefly explain the acronym MACRS.

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MACRS is short for Modified Accelerated ...

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Question 23

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

Opportunity costs should not be included as they are missed opportunities.

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

You have been asked to evaluate a project with infinite life. Sales and costs are projected to be $1000 and $500 respectively. There is no depreciation and the tax rate is 30%. The real required rate of return is 10%. The inflation rate is 4% and is expected to be 4% forever. Sales and costs will increase at the rate of inflation. If the project costs $3000, what is the NPV?

Real cash flow occurring in year-2 is $60,000. If the inflation rate is 5% per year, the real rate of interest is 2%, calculate the cash flow for the year-2.

Investment in net working capital is not depreciated because:

Which of the following countries allow firms to keep two separate sets of books, one for the stockholders and one for the tax authorities like the Internal Revenue Service? I. U.S.A II) Japan III) France

By undertaking the analysis in real terms, the financial manager avoids having to forecast inflation.

A capital equipment costing $400,000 today has no (zero) salvage value at the end of 5 years. If straight-line depreciation is used, what is the book value of the equipment at the end of three years?

If the nominal interest rate is 7. 5% and the inflation rate is 4%, what is the real interest rate?

If the discount rate is stated in nominal terms, then in order to calculate the NPV in a consistent manner requires that project: I. cash flows be estimated in nominal terms II. cash flows be estimated in real terms III. accounting income be used

When calculating cash flows, it is important to consider all incidental effects.

When evaluating a projects with positive NPV but variable life spans, the proper technique to employ is the equivalent annual annuity (EAA) approach.

Depreciation acts as a tax shield in reducing the taxes.

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

The rule for comparing machines with different lines is to select the machine with the greatest equivalent annual cost (EAC).

How do you compare projects with different lives?

Given the following data for Project M: \begin{array}{c}\begin{array}{lll}\\\text {Cash flow in real terms:}\\\text {Real discount rate =\mathbf{5} \% }\\\text {Nominal discount rate \( =10 \% \) }\\\text {Calculate the NPV of the project}\end{array}\begin{array}{lll}C_{0} & C_{1} & C_{2} \\-200 & 150 & 120\\\\\\\\\end{array}\end{array}